Forward-Looking Statements and Factors Affecting Future Results
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this document. This document contains "forward-looking statements" within the meaning of the federal securities laws. These statements relate to our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements other than statements of historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, terms such as "may," "will," "anticipates," "expects," "believes," "intends," "should" or comparable terms or the negative thereof. These statements are based on information available on the date of this filing and only speak as to the date hereof and no obligation to update such forward-looking statements should be assumed. Our actual results may differ materially from those reflected in the forward-looking statements contained herein as a result of a variety of factors, including, among other things:
(i) the elements discussed under âRisk factorsâ in part I, element 1A of our
report on Form 10-K ; uncertainties relating to the business operations of the operators of our
(ii) assets, including those relating to reimbursement by third party payers,
regulatory matters and occupancy levels; the impact of the novel coronavirus ("COVID-19") on our business and the business of our operators, including without limitation, the extent and
the duration of the COVID-19 pandemic, rising costs, staff shortages and
decrease in occupation levels experienced by skilled nursing operators
(iii) establishments (“SNF”) and serviced residences (“ALF”) related to
thus, the ability of operators to comply with infection control and
vaccination protocols, the long-term impact of vaccination on the facility
infection rate and the extent to which continued government support can
be available to operators to offset these costs and the related conditions
to that ;
the ability of any bankrupt Omega operator to reject
lease obligations, change the terms of Omega’s mortgages and prevent the
(iv) Omega’s ability to collect unpaid rent or interest during the term of a
bankruptcy proceedings and keep security deposits for the debtor
obligations and other costs and uncertainties associated with the operator
our ability to re-let, otherwise transition or sell underperforming assets
(v) or assets held for sale on a timely basis and on terms that allow us to
realize the carrying amount of these assets;
(vi) the availability and cost of capital to us;
(vii) changes in our credit ratings and the ratings of our debt securities;
(viii) competition in the financing of health establishments;
(ix) competition in the long-term healthcare sector and changes in the perception of
various types of long-term care facilities, including SNFs and ALFs;
(x) regulatory and other additional changes in the health sector;
(xi) changes in the financial situation of our operators;
(xii) the effect of economic and market conditions in general and, in particular,
in the health sector;
(xiii) changes in interest rates;
(xiv) the timing, amount and return of any additional investment;
(xv) changes in tax laws and regulations affecting real estate investment trusts
("REITs"); the potential impact of changes in the SNF and ALF markets or local real
(xvi) the inheritance conditions on our ability to dispose of assets held for sale for the
planned or timely product, or redeploy the product
thence on favorable terms;
(xvii) our ability to maintain our REIT status; and
the effect of other factors affecting our business or the activities of
(xviii) our operators that are beyond our or their control, including natural
disasters, other health crises or pandemics and government action;
particularly in the healthcare industry. 33 Table of Contents Overview
Omega Healthcare Investors, Inc.("Parent") is a Marylandcorporation that, together with its consolidated subsidiaries (collectively, "Omega", the "Company", "we", "our", "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 operators (we use the term "operator" to refer to our tenants and mortgagors and their affiliates whomanage and/or operate our properties) within 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 long-term "triple net" leases and mortgage agreements. Omega has elected to be taxed as a 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 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 September 30, 2021, Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP ("Omega OP Units"), and other investors owned approximately 3% of the outstanding Omega OP Units.
Update on the COVID-19 pandemic
The COVID-19 pandemic has significantly and adversely impacted SNFs and long-term care providers due to the higher rates of virus transmission and fatality among the elderly and frail populations that these facilities serve. As a result, many of our operators have been and may continue to be significantly impacted by the pandemic. During the third and fourth quarters of 2020, four of our operators, including
Agemo Holdings, LLC("Agemo") and Genesis Healthcare, Inc. ("Genesis"), indicated in their financial statements substantial doubt regarding their ability to continue as going concerns, citing in part the impact of the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support. This resulted in placing these operators on a cash basis of revenue recognition and a corresponding write-off of approximately $143.0 millionin aggregate of contractual receivables, straight-line receivables, and lease inducements to rental income during fiscal year 2020. During the nine months ended September 30, 2021, Agemo, Gulf Coast Health Care LLC(together with certain affiliates "Gulf Coast") and one other operator either failed to make contractual rent or interest payments for a period or have informed us that they would be unable to pay us rent for the foreseeable future. As of September 30, 2021, we have placed four operators, inclusive of Gulf Coastand the one other non-paying operator noted above, on a cash basis of revenue recognition during 2021 as collection of substantially all contractual lease payments with these four operators was no longer probable. On October 14, 2021, Gulf Coastcommenced voluntary cases under chapter 11 of the United StatesBankruptcy Code. See "Receivables, Other Investments and Operator Collectibility - Gulf Coast" below. Additionally, in October 2021, Guardian Healthcare("Guardian"), excluded from the discussion above, failed to make contractual rent and interest payments under its lease agreement for 26 operating facilities and on its $112.5 millionmortgage loan agreement. See "Portfolio and Recent Developments - Guardian" below. We believe these operators were impacted by, among other things, reduced revenue as a result of lower occupancy and increased expenses resulting from the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support. In connection with these developments, we wrote off approximately $20.8 millionin aggregate of straight-line receivables to rental income for the nine months ended September 30, 2021. Additionally, in the third quarter of 2021, we have recorded impairment charges of $16.7 millionrelated to two loans outstanding with Agemo. The operators that have missed rent or interest payments, stopped paying rent or that were placed on a cash basis prior to the end of the third quarter of 2021 collectively represent 7.6% and 9.3%, respectively, of our total revenues (excluding the impact of the write-offs in 2021 and 2020) for the nine months ended September 30, 2021and 2020. We remain cautious as the COVID-19 pandemic continues to have a significant impact on our operators and their financial conditions, particularly given continued uncertainty regarding the availability of sufficient government support, the persistence of staffing shortages that continue to impact our operators' occupancy levels and profitability, the impact of governmental vaccine mandates for staff on these ongoing staffing shortages, other factors that may impact virus transmission in our facilities, the commencement in April 2021for many of our operators of the repayment of accelerated payments of Medicare funds that were previously received as Advanced Medicare payments in 2020 and the expected commencement in December 2021of repayment of deferred FICA obligations. 34 Table of Contents As of October 27, 2021, our operators reported cases of COVID-19 within 263, or 27.7%, of our 949 operating facilities as of December 31, 2020, which includes cases involving employees and residents. This represents a meaningful decline in cases from the 614 facilities with cases, or 64% of our 959 operating facilities, that our operators reported as of December 22, 2020, but an increase from the 153 facilities with cases, or 16%, of our 949 operating facilities, that our operators reported as of July 27, 2021. Consistent with national trends, we experienced a slight downturn in the number of COVID-19 cases in our facilities during September 2021. We caution that we have not independently validated any such facility virus incidence information, it may be reported on an inconsistent basis by our operators, and we can provide no assurance regarding its accuracy or that there have not been any changes since the time the information was obtained from our operators; we also undertake no duty to update this information. While we believe the decline noted above in reported cases since late 2020 is due in large part to vaccination programs for COVID-19 which have been implemented in most of our facilities, it remains uncertain when and to what extent vaccination programs for COVID-19 and any booster doses will continue to mitigate the effects of COVID-19 in our facilities, the impact of governmental vaccine mandates for staff on ongoing staffing shortages in our facilities, other factors that impact virus transmission in our facilities, or how effective existing vaccines or booster doses will be against the variants of the COVID-19 virus; the impact of these programs will depend in part on the continued speed, distribution, efficacy and delivery of the vaccine and booster doses in our facilities, compliance with staff vaccination requirements as well as participation levels in vaccination programs among the residents and employees of our operators. In addition to experiencing outbreaks of positive cases and deaths of residents and employees during the pandemic, our operators have been required to, and continue to, adapt their operations rapidly throughout the pandemic to manage the spread of the COVID-19 virus as well as the implementation of new treatments and vaccines, and to implement new requirements relating to infection control, staffing levels, personal protective equipment ("PPE"), quality of care, visitation protocols, and reporting, among other regulations, throughout the pandemic while facing staffing shortages that have accelerated during the pandemic and that may impede the delivery of care. Many of our operators have reported incurring significant cost increases as a result of the COVID-19 pandemic, with dramatic increases for facilities with positive cases. These increases have been offset to some extent by increases in reimbursements due to increased skilling in place, which has been necessitated by pandemic-related protocols and which may decrease when such protocols subside. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay and reliance on agency staffing due to staffing shortages, as well as a significant increase in both the cost and usage of PPE, testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs. The federal government announced in August and September 2021that it would be requiring SNF and health care workers to be vaccinated against COVID-19 and issued an emergency implementing regulation effective November 5, 2021requiring covered health care facilities to ensure eligible staff have received a first vaccine dose as of December 5, 2021and a second dose of a two-dose vaccine as of January 4, 2022, with certain permitted exemptions in alignment with federal law. While we expect vaccination rates in our facilities to increase once such requirements are implemented, significant uncertainty remains regarding the potential impact such mandates may have on ongoing staffing shortages in our facilities. In addition, our facilities, on average, have experienced declines, in some cases that are material, in occupancy levels as a result of the pandemic. While these declines have improved on average during 2021, average occupancy has not returned to pre-pandemic levels and improvements in occupancy levels remain uneven; it remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels. We believe these challenges to occupancy recovery may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs. 35
While substantial government support, primarily through the federal CARES Act in the
U.S.and distribution of PPE, vaccines and testing equipment by federal and state governments, was allocated to SNFs and to a lesser extent to ALFs in 2020, federal relief efforts have been limited in 2021 as have relief efforts in certain states, and further government support will likely be needed to continue to offset these impacts. It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts. In particular, while $25.5 billionin federal funding for health care providers impacted by COVID-19 was announced in September 2021, it remains unclear the extent to which these funds or remaining unallocated funds under the Public Health and Social Services Emergency Fund(" Provider Relief Fund") will be distributed to our operators in any meaningful way, whether additional funds will be added to the Provider Relief Fundor otherwise allocated to health care operators or our operators, or whether additional Medicaid funds under the American Rescue Plan Act of 2021 (the "American Rescue Plan Act") in the U.S.will ultimately support reimbursement to our operators. Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief that is sufficient and timely, we anticipate that the operating results of certain of our operators would be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place. There are a number of uncertainties we face as we consider the potential impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the impact of vaccination programs, including booster doses, and participation levels in those programs in reducing the spread of COVID-19 in our facilities, the impact of vaccine mandates on ongoing staffing shortages in our facilities, and the extent to which funding support from the federal government and the states will continue to offset these incremental costs as well as lost revenues. Notwithstanding vaccination programs, we expect that heightened clinical protocols for infection control within facilities will continue for some period; however, we do not know if future reimbursement rates or equipment provided by governmental agencies will be sufficient to cover the increased costs of enhanced infection control and monitoring. While we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more information as to the level of costs our operators will continue to experience and for how long, and the level of additional governmental support that will be available to them, the potential support our operators may request from us and the future demand for needs-based skilled nursing care and senior living facilities. We continue to monitor the rate of occupancy recovery at many of our operators, and it remains uncertain whether and when demand, staffing availability and occupancy levels will return to pre-COVID-19 levels. We continue to monitor the impacts of other regulatory changes, as discussed below, including any significant limits on the scope of services reimbursed and on reimbursement rates and fees, which could have a material adverse effect on an operator's results of operations and financial condition, which could adversely affect the operator's ability to meet its obligations to us.
Government regulations and reimbursement
The following information supplements and updates, and should be read in conjunction with the information in Section 1. Businesses – Government Regulation and Reimbursement in our Annual Report on Form 10-K for the year ended
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 impacted by a variety of laws and regulations in their jurisdiction. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operators, in addition to regulatory non-compliance by our operators, can have a significant effect on the operations and financial condition of our operators, which in turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others. The U.S. Department of Health and Human Services("HHS") declared a public health emergency on January 31, 2020following the World Health Organization'sdecision to declare COVID-19 a public health emergency of international concern. This declaration, which has been extended through January 16, 2022, allows HHS to provide temporary regulatory waivers and new reimbursement rules designed to equip providers with flexibility to respond to the COVID-19 pandemic by suspending various Medicare patient coverage criteria and documentation and care requirements, including, for example, suspension of the three-day prior hospital stay coverage requirement and expanding the list of approved services which may be provided via telehealth. These regulatory actions could contribute to a change in census volumes and skilled nursing mix that may not otherwise have occurred. It remains uncertain when federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the public health emergency due to the exercise of enforcement discretion. These temporary changes to regulations and reimbursement, as well as emergency legislation, including the CARES Act enacted on March 27, 2020and discussed below, continue to have a significant impact on the operations and financial condition of our operators. The extent of the COVID-19 pandemic's effect on the Company's and our operators' operational and financial performance will depend on future developments, including the sufficiency and timeliness of additional governmental relief, the duration, spread and intensity of the outbreak, the impact of vaccine distributions and booster doses on our operators and their populations, the impact of vaccine mandates on staffing shortages at our operators, as well as the difference in how the pandemic may impact SNFs in contrast to ALFs, all of which developments and impacts are uncertain and difficult to predict. Due to these uncertainties, we are not able at this time to estimate the effect of these factors on our business; however, the adverse impact on our business, results of operations, financial condition and cash flows could be material. 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 health care programs are currently, or will be in the future, sufficient to fully reimburse the property operators for their operating and capital expenses.
COVID-19 related reimbursement changes:
U.S.Federal Stimulus Funds and Financial Assistance for Health Care Providers. In response to the pandemic, Congresshas enacted a series of economic stimulus and relief measures. On March 18, 2020, the Families First Coronavirus Response Act was enacted in the U.S., providing a temporary 6.2% increase to each qualifying state and territory's Medicaid Federal Medical Assistance Percentage ("FMAP") effective January 1, 2020. The temporary FMAP increase will extend through the last day of the calendar quarter in which the public health emergency terminates. States will make individual determinations about how this additional Medicaid reimbursement will be applied to SNFs, if at all. 37
In further response to the pandemic, in 2020, the CARES Act authorized approximately
$178 billionto be distributed through the Provider Relief Fundto reimburse eligible healthcare providers for health care related expenses or lost revenues that are attributable to coronavirus, and in September 2021, HHS announced the availability of $25.5 billionin provider funding through the CARES Act and American Rescue Plan Act. The Provider Relief Fundis administered under the broad authority and discretion of HHS and recipients are not required to repay distributions received to the extent they are used in compliance with applicable requirements. HHS began distributing Provider Relief Fundgrants in April 2020and has made grants available to various provider groups in four general phases. In May 2020, HHS announced that approximately $9.5 billionin targeted distributions would be made available to eligible skilled nursing facilities, approximately $2.5 billionof which were composed of performance-based incentive payments tied to a facility's infection rate. Approximately $8.5 billionin additional funds were added to the Provider Relief Fundthrough the American Rescue Plan Act enacted on March 11, 2021; however, these funds are limited to rural providers and suppliers. In September 2021, HHS announced the release of $25.5 billionof funding, including $17 billionin Phase 4 Provider Relief Fundpayments for a broad range of healthcare providers whocan document revenue loss and expenses associated with the pandemic between July 1, 2020and March 31, 2021, as well as release of the $8.5 billionin funding for rural providers, including those with Medicaid and Medicare patients. In addition, in September 2021, the CDCannounced it would allocate $500 millionto staffing, training and deployment of state-based nursing home and long-term care "strike teams" to assist facilities with known or suspected COVID-19 outbreaks. Given that HHS has announced that a portion of the Provider Relief Fundis being allocated to reimbursement of the testing, treatment and vaccination of uninsured patients, it remains unclear the extent to which any additional amounts from the Provider Relief Fundwill be released to support healthcare providers. In general, there are substantial uncertainties regarding the extent to which our operators will receive funds under the additional funding announced in September 2021, or will receive funds which have not been allocated, whether additional funds will be allocated to the Provider Relief Fund, health care providers or senior care providers and whether additional payments will be distributed to providers, the financial impact of receiving any of these funds on their operations or financial condition, and whether operators will be able to meet the compliance requirements associated with the funds. HHS continues to evaluate and provide allocations of, and issue regulation and guidance regarding, grants made under the CARES Act. The CARES Act and related legislation also made other forms of financial assistance available to healthcare providers, which have the potential to impact our operators to varying degrees. This assistance includes Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which made available accelerated payments of Medicare funds in order to increase cash flow to providers. These payments are loans that providers are scheduled to repay beginning one year from the issuance date of each provider's or supplier's accelerated or advance payment, with repayment made through automatic recoupment of 25% of Medicare payments otherwise owed to the provider or supplier for eleven months, followed by an increase to 50% for another six months, after which any outstanding balance would be repaid subject to an interest rate of 4%. We believe these repayments commenced for many of our operators in April 2021and have adversely impacted, and will continue to adversely impact, operating cash flows of these operators. Additionally, the Centers for Medicare and Medicaid Services("CMS") suspended Medicare sequestration payment adjustments, which would have otherwise reduced payments to Medicare providers by 2%, from May 1, 2020through December 31, 2021, but also extended sequestration through 2030. While not limited to healthcare providers, the CARES Act additionally provided payroll tax relief for employers, allowing them to defer payment of employer Social Securitytaxes that are otherwise owed for wage payments made after March 27, 2020through December 31, 2020to December 31, 2021with respect to 50% of the payroll taxes owed, with the remaining 50% deferred until December 31, 2022. 38
In addition to COVID-19 reimbursement changes, several regulatory initiatives announced in 2020 and 2021 focused on addressing quality of care in long-term care facilities, including those related to COVID-19 testing and infection control protocols, vaccine protocols, staffing levels, reporting requirements, and visitation policies, as well as increased inspection of nursing homes. In
August 2021, CMS announced it was developing an emergency regulation requiring staff vaccinations within the nation's more than 15,000 Medicare and Medicaid-participating nursing homes, and in September 2021, CMS further announced that the scope of the regulation will be expanded to include workers in hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. In addition, recent updates to the Nursing Home Care website and the Five Star Quality Rating System include revisions to the inspection process, adjustment of staffing rating thresholds and the implementation of new quality measures. Although the American Rescue Plan Act did not allocate specific funds to SNF or assisted living facility providers, approximately $200 millionwas allocated to quality improvement organizations to provide infection control and vaccination uptake support to SNFs and $500 millionhas been allocated by the CDCto staffing, training and deployment of state-based nursing home and long-term care "strike teams" to assist facilities with known or suspected COVID-19 outbreaks. On June 16, 2020, the U.S. House of RepresentativesSelect Subcommittee on the Coronavirus Crisis announced the launch of an investigation into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. The Select Subcommittee continued to be active throughout the remainder of 2020 and the third quarter of 2021. In March 2021, the Oversight Subcommittee of the House Ways and Means Committeeheld a hearing on examining the impact of private equity in the U.S.health care system, including the impact on quality of care provided within the skilled nursing industry. These hearings, as well as additional calls for government review of the role of private equity in the U.S.healthcare industry, could result in legislation imposing additional requirements on our operators.
Refund In general:
Medicaid. The American Rescue Plan Act contains several provisions designed to increase coverage, expand benefits, and adjust federal financing for state Medicaid programs. For example, the American Rescue Plan Act increases the FMAP by 10 percentage points for state home and community-based services expenditures beginning
April 1, 2021through March 30, 2022in an effort to assist seniors and people with disabilities to receive services safely in the community rather than in nursing homes and other congregate care settings. As a condition for receiving the FMAP increase, states must enhance, expand, or strengthen their Medicaid home and community-based services program during this period. These potential enhancements to Medicaid reimbursement funding may be offset in certain states by state budgetary concerns, the ability of the state to allocate matching funds and to comply with the new requirements, the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes resulting from the COVID-19 pandemic, and the potential allocation of state Medicaid funds available for reimbursement away from SNFs in favor of home and community-based programs. These challenges may particularly impact us in states where we have a larger presence, including Floridaand Texas. In Texasin particular, several of our operators have historically experienced lower operating margins on their SNFs, as compared to other states, as a result of lower Medicaid reimbursement rates and higher labor costs. Our operators in Texasmay also be adversely impacted by the expected expiration, to be effective upon expiration of the federally declared public health emergency, of an add-on by the state to the daily reimbursement rate for Medicaid patients during the pandemic. In Florida, while added support to our operators during the pandemic has generally been limited, we expect our operators in the state may receive some additional support through the state's approval on November 4, 2021, of approximately $100 millionin additional FMAP funds for nursing homes, to be distributed through increased Medicaid rates over a three-month period . 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. 39
July 29, 2021, CMS issued a final rule regarding the government fiscal year 2022 Medicare payment rates and quality payment programs for SNFs, with aggregate Medicare Part A payments projected to increase by $410 million, or 1.2%, for fiscal year 2022 compared to fiscal year 2021. This estimated reimbursement increase is attributable to a 2.7% market basket increase factor less a 0.8 percentage point forecast error adjustment and a 0.7 percentage point productivity adjustment, and a $1.2 milliondecrease due to the proposed reduction to the SNF prospective payment system rates to account for the recent blood-clotting factors exclusion. The annual update is reduced by two percentage points for SNFs that fail to submit required quality data to CMS under the SNF Quality Reporting Program. CMS has indicated that these impact figures did not incorporate the SNF Value-Based Program reductions that are estimated to be $184.25 millionin fiscal year 2022. Payments to providers continue to be increasingly tied to quality and efficiency. The Patient Driven Payment Model ("PDPM"), which was designed by CMS to improve the incentives to treat the needs of the whole patient, became effective October 1, 2019. Prior to COVID-19, we believed that certain of our operators could realize efficiencies and cost savings from increased concurrent and group therapy under PDPM and some had reported early positive results. Given the ongoing impacts of COVID-19, many operators are and may continue to be restricted from pursuing concurrent and group therapy and unable to realize these benefits. Additionally, our operators continue to adapt to the reimbursement changes and other payment reforms resulting from the value based purchasing programs applicable to SNFs under the 2014 Protecting Access to Medicare Act. These reimbursement changes have had and may, together with any further reimbursement changes to PDPM or value-based purchasing models, in the future have an adverse effect on the operations and financial condition of some operators and could adversely impact the ability of operators to meet their obligations to us.
SNFs are under intense scrutiny for ensuring the quality of care being rendered to residents and appropriate billing practices conducted by the facility.
The Department of Justice("DOJ") has historically used the False Claims Act to civilly pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard. For example, Californiaprosecutors announced in March 2021an 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 DOJlaunched 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.
Results of operations
The following is our discussion of the consolidated results of operations, financial condition, liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes.
40 Table of Contents
Three months ended
Our revenues for the three months ended
September 30, 2021totaled $281.7 million, an increase of approximately $162.5 millionover the same period in 2020. The $162.5 millionincrease was primarily the result of (i) a $142.2 millionincrease in rental income due to a net reduction in straight-line rent receivable and lease inducement write-offs in 2021 following significant write-offs associated with Agemo and Genesis in the third quarter of 2020 as a result of placing these operators on a cash basis for revenue recognition and (ii) a $28.1 millionincrease in rental income resulting from facility acquisitions, facilities placed in service, and facility transitions. These increases were partially offset by (i) a $2.6 milliondecrease in rental income resulting from the acceleration of certain in-place lease liabilities, (ii) a $1.1 milliondecrease in rental income due to facility sales and (iii) a $1.5 milliondecrease in mortgage interest income and other investment income primarily related to loan settlements, and principal payments made against outstanding loans.
Expenses for the three months ended
September 30, 2021totaled $194.2 million, a decrease of approximately $18.0 millionover the same period in 2020. The $18.0 milliondecrease was primarily due to: (i) a $6.6 milliondecrease in provision for credit losses primarily as a result of lower reserves taken against loans outstanding to Agemo (see Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Receivables, Other Investments and Operator Collectibility- Agemo) in the third quarter of 2021 compared to the same period in 2020 and (ii) a $23.2 milliondecrease in impairment on real estate properties related to six facilities in the third quarter of 2021 compared to seven facilities during the same period in 2020. These decreases were partially offset by (i) a $5.0 millionincrease in depreciation expense primarily resulting from facility acquisitions and capital additions, offset by facility sales and facilities reclassified to assets held for sale and (ii) a $4.7 millionincrease in interest expense primarily resulting from the issuance during the fourth quarter of 2020 of the $700 millionof Senior Notes due 2031 and the issuance during the first quarter of 2021 of the $700 millionof Senior Notes due 2033, partially offset by the retirement of term loans in the fourth quarter of 2020 and lower average borrowings under the revolving credit facility.
Other income (expenses)
For the three months ended
September 30, 2021, total other income was $54.8 million, an increase of approximately $56.5 millionover the same period in 2020. The decrease was mainly due to a $56.9 millionincrease in gain on assets sold related to the sale of 15 facilities in the third quarter of 2021 compared to the sale of six facilities during the same period in 2020.
Nine months ended
Our revenues for the nine months ended
September 30, 2021totaled $812.9 million, an increase of approximately $184.3 millionover the same period in 2020. The $184.3 millionincrease was primarily the result of (i) a $123.7 millionincrease in rental income due to a net reduction in straight-line rent receivable and lease inducement write-offs in 2021 following significant write-offs associated with Agemo and Genesis in the third quarter of 2020 as a result of placing these operators on a cash basis for revenue recognition, (ii) a $83.1 millionincrease in rental income resulting from facility acquisitions, facilities placed in service, and facility transitions and (iii) an $6.7 millionincrease in mortgage interest income and other investment income primarily due to new and refinanced mortgages and notes and additional funding to existing operators partially offset by principal payments. These increases were partially offset by (i) a $25.9 milliondecrease in rental income resulting from not recording straight-line rent for operators placed on a cash basis for revenue recognition in 2020 and facility sales and (ii) a $2.0 milliondecrease in miscellaneous income which is primarily related to an operator's late fees
and reduced management fees. 41 Table of Contents Expenses Expenses for the nine months ended
September 30, 2021totaled $560.4 million, an increase of approximately $18.0 millionover the same period in 2020. The $18.0 millionincrease was primarily due to: (i) a $11.6 millionincrease in interest expense primarily resulting from the issuance during the fourth quarter of 2020 of the $700 millionof Senior Notes due 2031 and the issuance during the first quarter of 2021 of the $700 millionof Senior Notes due 2033, partially offset by the retirement of term loans in the fourth quarter of 2020 and lower average borrowings under the credit facility, (ii) a $9.4 millionincrease in depreciation expense primarily resulting from facility acquisitions and capital additions, offset by facility sales and facilities reclassified to assets held for sale (discussed in further detail below) and (iii) a $1.8 millionincrease in acquisition, merger and transition related costs primarily resulting from transitioning 14 facilities and selling 4 facilities associated with Daybreak Ventures, LLC("Daybreak"). These increases were partially offset by (i) a $1.3 milliondecrease in impairment on real estate properties related to 13 facilities compared to 18 facilities during the same period in 2020 and (ii) a $5.6 milliondecrease in provision for credit losses as a result of lower reserves taken against loans outstanding to Agemo (see Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Receivables, Other Investments and Operator Collectibility - Agemo) in the third quarter of 2021 compared to the same period in 2020.
Other income (expenses)
For the nine months ended
September 30, 2021, total other income was $129.9 million, an increase of approximately $117.6 millionover the same period in 2020. The increase was mainly due to a $146.7 millionincrease in gain on assets sold related to the sale of 45 facilities compared to the sale of 27 facilities during the same period in 2020 offset by a $29.8 millionincrease in loss on debt extinguishment primarily related to fees, premiums, and expenses related to the purchase of $350 millionof the 4.375% Senior Notes due 2023 during the first quarter of 2021. National Association of Real Estate Investment Trusts Funds From Operations We use funds from operations ("Nareit FFO"), a non-GAAP financial measure, as one of several criteria to measure the operating performance of our business. We calculate and report Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts("Nareit"). Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures and changes in the fair value of warrants. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. Revenue recognized based on the application of security deposits and letters of credit or based on the ability to offset against other financial instruments is included within Nareit FFO. We believe that Nareit FFO is an important supplemental measure of our operating performance. As real estate assets (except land) are depreciated under GAAP, such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions. Nareit FFO was designed by the real estate industry to address this issue. Nareit FFO herein is not necessarily comparable to Nareit FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us. We further believe that by excluding the effect of depreciation, amortization, impairment on real estate assets and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Nareit FFO can facilitate comparisons of operating performance between periods and between other REITs. We offer this measure to assist the users of our financial statements in evaluating our financial performance under GAAP, and Nareit FFO should not be considered a measure of liquidity, an alternative to net income or an indicator of any other performance measure determined in accordance with GAAP. Investors and potential investors in our securities should not rely on this measure as a substitute for any GAAP measure, including net income. 42
The following table shows our Nareit FFO results for the three and nine months ended.
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Net income (loss)(1)(2)
$ 142,835 $ (93,768) $ 394,064 $ 100,471(Deduct gain) add back loss from real estate dispositions (56,169) 749 (160,634) (13,932) Add back loss (deduct gain) from real estate dispositions - unconsolidated joint ventures 2 (4,483)
86,668 (97,502) 218,685 80,101 Elimination of non-cash items included in net income: Depreciation and amortization 86,097 81,072 256,745 247,301 Depreciation - unconsolidated joint ventures 2,951 3,379 9,379 10,561 Add back impairments on real estate properties 4,942 28,105 42,453 43,732 Add back impairments on real estate properties - unconsolidated joint ventures - - 4,430 - Add back unrealized loss on warrants - 87
43 927 Nareit FFO
$ 180,658 $ 15,141 $ 531,735 $ 382,622
The three and nine months ended
security deposits (letter of credit and cash deposits) in revenue.
The three and nine months ended
rent not collected on interest and principal (in the fourth quarter)
certain debt securities of Omega.
Portfolio and recent developments
The following table summarizes the significant asset acquisitions that took place during the first nine months of 2021:
Number of Total Initial Facilities Country/ Investment Annual
Period SNF ALF Specialty State
(in millions) Cash Yield(1) Q1 - 17 7 AZ, CA, FL, IL, NJ, OR, PA, TN, TX, VA, WA $ 511.3 (2) 8.43 % Q1 6 - - FL 83.1 9.25 % Q3 - 2 - U.K. 9.6 7.89 % Total 6 19 7 $ 604.0
(1) The initial annual cash yield reflects the initial annual cash rent divided
by the purchase price.
Brookdale Senior Living Inc.
During the second quarter of 2021, we acquired a parcel of land (not reflected in the table above) for approximately
During the third quarter of 2021, we purchased a real estate property located in
Washington, D.C.(not reflected in the table above) for approximately $68.0 millionand plan to redevelop the property into a 174 bed ALF. Concurrent with the acquisition, we entered into a single facility lease for this property with Maplewood Senior Living ("Maplewood") through August 31, 2045. For accounting purposes, the lease will commence upon the substantial completion of construction of the ALF, which is currently expected to be in the first quarter of 2025. The lease provides for the accrual of financing costs at a rate of 5% per annum during the construction phase. The lease provides for an annual cash yield of 6% in the first year following the completion of construction, increasing to 7% in year two and 8% in year three with 2.5% annual escalators thereafter. We are committed to a maximum funding of $177.7 millionfor the redevelopment of the real estate property, subject to ordinary development related cost changes (see Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Commitments). 43 Table of Contents
July 1, 2021, we financed six SNFs in Ohioand amended an existing $6.4 millionmortgage, inclusive of 2 Ohio SNFs, to include the six facilities in a consolidated $72.4 millionmortgage for eight Ohiofacilities bearing interest at an initial rate of 10.5% per annum. In conjunction with this transaction, we also acquired three Marylandfacilities that were previously subject to a mortgage issued by Omega bearing interest at 13.75% per annum with a principal balance of $36.0 millionthat was included in other mortgage notes outstanding. The purchase price for these three facilities was equal to the remaining mortgage principal amount, and the three acquired Marylandfacilities were subsequently leased back to the seller for a term expiring on December 31, 2032, assuming Omega exercises the options under the agreement. The base rent in the initial year is approximately $5.0 millionand includes annual escalators of 2.5%. Other Equity Investments In the third quarter of 2021, we made an investment of $20.0 millionin SafelyYou, Inc.("SafelyYou"), a technology company that has developed artificial-intelligence enabled video that detects and helps prevent resident falls in ALFs and SNFs. Through our investment, we obtained preferred shares representing 5% of the outstanding equity of SafelyYou and warrants to purchase SafelyYou common stock representing an additional 5% of outstanding equity as of the date of our investment. SafelyYou has committed, for a specified period, to using the proceeds of our investment to install its technology in our facilities or other facilities of our operators. The vesting of the warrants is contingent upon SafelyYou's attainment of certain installation targets in our facilities. To the extend these installation targets are not attained, the investment funds associated with the unvested warrants would be returned to Omega. The investment in the preferred shares and warrants are recorded within other assets on the consolidated balance sheets. Other Recent Developments Gulf CoastDuring the second quarter of 2021, Gulf Coaststopped paying contractual rent under its master lease agreement for 24 facilities because of on-going liquidity issues. On October 14, 2021, Gulf Coastcommenced voluntary cases under chapter 11 of the United States Bankruptcy Code. See "Receivables, Other Investments and Operator Collectibility - Gulf Coast" below.
October 2021, Guardian failed to make contractual rent and interest payments under its lease agreement for 26 operating facilities and on its $112.5 millionmortgage loan agreement, bearing interest at 10.81%, for nine facilities, due to on-going liquidity issues. We have had discussions with Guardian regarding restructuring certain lease and mortgage loan terms but have yet to reach an agreement. As of September 30, 2021, we had $7.4 millionof letters of credit from Guardian as collateral which may be applied against our uncollected rent and interest receivables. As discussed in Note 7 - Allowance for Credit Losses, during the third quarter of 2021, we reduced the risk rating on the mortgage loan from a 4 to a 5. Guardian represents approximately 3.2% and 3.5% of our total revenues (excluding the impact of straight-line write-offs) for the nine months ended September 30, 2021, and 2020, respectively.
Asset sales and impairment
During the three and nine months ended
September 30, 2021, we sold 15 and 45 facilities, subject to operating leases, for approximately $109.7 millionand $310.8 millionin net cash proceeds, recognizing net gains of approximately $56.2 millionand $160.6 million.
44 Table of Contents Daybreak
During the first quarter of 2021, we transitioned 14 Daybreak facilities to existing operators and sold two Daybreak facilities. During the second quarter of 2021, we sold the two remaining Daybreak facilities. The total annual rent or rent equivalents achieved through transitioning the Daybreak portfolio equal
$16.6 million. On April 6, 2021, we terminated the Daybreak master lease and exited that relationship. Real Estate Impairments During the three and nine months ended September 30, 2021, we recorded impairments on six and 13 facilities of approximately $4.9 millionand $42.5 million, respectively. Our recorded impairments were primarily the result of reclassifying 12 facilities to assets held for sale for which the carrying values exceeded the estimated fair values less costs to sell. We also recognized an impairment on one held for use facility because of the closure of the facility in the first quarter. To estimate the fair value of these facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input).
Receivables, other investments and recovery of the operator
A summary of our net receivables by nature is as follows:
September 30, December 31, 2021 2020 (in thousands) Contractual receivables - net $ 16,658
Effective interest rate receivable $ 10,031
Rents to be received on the shelf
Lease inducements 77,799
Other receivables and rental incentives
Agemo In August and
September 2021, Agemo, a nonconsolidated variable interest entity ("VIE"), failed to pay contractual rent and interest due under their lease and loan agreements. Subsequent to quarter end, Agemo also failed to make contractual payments in October 2021. Agemo was formed in May 2018by Signature Healthcare, LLC, as part of an out-of-court restructuring agreement, to be the holding company of their leases and loans with Omega. We placed Agemo on a cash basis of revenue recognition during the third quarter of 2020 as collection of substantially all contractual lease payments due from them was deemed no longer probable because of information received regarding substantial doubt of their ability to continue as a going concern. Agemo continued to make their rental and interest payments to us until August 2021. During August and September 2021, we recorded $8.4 millionof revenue by drawing on the letter of credit and through application of the security deposit balance. For the nine months ended September 30, 2021and 2020, Agemo generated approximately 4.7% and 6.0%, respectively, of our total revenues (excluding the impact of write-offs related to this operator in 2020). As part of the 2018 restructuring agreement with Agemo discussed above, Omega agreed to, among other terms, defer rent of $6.3 millionper annum through April 2021. During the nine months ended September 30, 2021, the Agemo lease was amended to allow for the extension of the rent deferral through October 2021, which represents an additional deferral of approximately $3.2 millionof rent. Additionally, in the third quarter, we entered into a forbearance agreement with Agemo pursuant to which we agreed to forbear from exercising remedies under our lease and loan agreements until October 31, 2021. The forbearance period and rent deferral period were subsequently extended to November 30, 2021. 45
September 30, 2021, we have two loans outstanding to Agemo, a term loan with remaining principal of $32.0 millionthat bears interest at 9% per annum and matures on December 31, 2024(the "Agemo Term Loan") and a $25.0 millionsecured working capital loan bearing interest at 7% per annum that matures on April 30, 2025(the "Agemo WC Loan"). The Agemo Term Loan is secured by a security interest in certain collateral of Agemo and the Agemo WC Loan is secured by a collateral package that includes a second lien on the accounts receivable of Agemo. During the third quarter of 2020, we evaluated both loans for impairment upon receiving information from Agemo regarding substantial doubt of its ability to continue as a going concern. Based on our evaluation, we recorded a provision for credit loss of $22.7 millionin the third quarter of 2020 to reduce the carrying value of the loans to the fair value of the underlying collateral. We have continued to monitor the fair value of the collateral associated with these loans on a quarterly basis. In the third quarter of 2021, we recorded an additional provision for credit losses of $16.7 millionrelated to these loans as a result of a reduction in the fair value of the underlying collateral assets supporting the current carrying values. The reduction in fair value of the collateral assets was primarily driven by the application of Agemo's $9.3 millionletter of credit to Omega's uncollected receivables, that supported the value of the Agemo Term Loan, and a reduction in Agemo's working capital accessible to Omega as collateral, after considering other liens on the assets.
During the second quarter of 2021,
Gulf Coaststopped paying contractual rent under its master lease agreement for 24 facilities because of on-going liquidity issues. As discussed below, on October 14, 2021, Gulf Coastcommenced voluntary cases under chapter 11 of the United States Bankruptcy Code. Gulf Coastrepresents approximately 2.6% and 2.8% of our total revenues (excluding the impact of write-offs related to Gulf Coastin 2021) for the nine months ended September 30, 2021and 2020, respectively. As a result of Gulf Coast's non-payment of contractual rent, in the second quarter of 2021, we placed Gulf Coaston a cash basis of revenue recognition and wrote-off straight-line rent receivable balances of $17.4 millionthrough rental income. Subsequent to placing Gulf Coaston a cash basis of revenue recognition in June 2021, we recognized $9.8 millionof contractual rent during the second and third quarters, based on our ability to offset any uncollected rent receivables against Gulf Coast's security deposit and against certain debt obligations of Omega, as discussed further below. We held a security deposit of $3.3 millionfrom Gulf Coast, which we have applied against Gulf Coast's obligations in the second and third quarters of 2021. In relation to Gulf Coast, Omega, through subsidiaries, is the obligor on five notes due to third parties with aggregate outstanding principal of $20.0 million(collectively, the "Subordinated Debt") that bear interest at 9% per annum with a maturity date of December 21, 2021(see Note 15 - Borrowing Activities and Arrangements). Under the terms of the Subordinated Debt, to the extent Gulf Coastfails to pay rent when due to us under its master lease, Gulf Coast's unpaid rent can be used to offset Omega's obligations under the Subordinated Debt (on a quarterly basis with respect to interest and, under some circumstances, on an annual basis with respect to principal). As of September 30, 2021, we have offset $0.9 millionof accrued interest under the Subordinated Debt against the uncollected receivables of Gulf Coast. We intend to offset any unpaid contractual receivables, after reflecting the application of security deposits and interest offsets, against the principal of the Subordinated Debt in the fourth quarter of 2021. As of September 30, 2021, we have $5.6 millionof contractual rent receivables outstanding from Gulf Coast, after reflecting the application of security deposits and interest offsets, and without giving effect to our legal acceleration of rent discussed below. As a result of Gulf Coast's non-payment of contractual rent, in August 2021, we exercised our right to accelerate the full amount of rent due under Gulf Coast's master lease agreement, payment of which will be subject to the Bankruptcy Code and approval of the bankruptcy court in Gulf Coast'schapter 11 cases. In August 2021, following an assertion by the holders of the Subordinated Debt that our prior exercise of offset rights had resulted in defaults under the terms of the Subordinated Debt, we also filed suit in the Circuit Court for Baltimore Countyagainst the holders of the Subordinated Debt seeking a declaratory judgment to, among other items, declare that the aggregate amount of unpaid rent due from Gulf Coastunder the master lease agreement exceeds all amounts which otherwise would be due and owing by Omega under the Subordinated Debt, and that all principal and interest due and owing under the Subordinated Debt are to be offset in full as of December 31, 2021. In October 2021, the defendants in the case filed a motion to dismiss for lack of personal jurisdiction. While Omega believes it is entitled to the enforcement of the offset rights sought in the action, the outcome of litigation is unpredictable, and Omega cannot predict the outcome of the declaratory judgment action. 46
As noted above, on
October 14, 2021, Gulf Coastcommenced voluntary cases under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware(the " Bankruptcy Court"). As described in Gulf Coast'sfilings with the Bankruptcy Court, we have entered into a Restructuring Support Agreement (the "Support Agreement") that is expected to form the basis for Gulf Coast's restructuring and liquidation. The Support Agreement establishes a timeline (subject to Gulf Coast's assumption of the Support Agreement with the approval of the Bankruptcy Court) for the implementation of Gulf Coast's planned restructuring and liquidation, including the potential transition of management of the operations of the facilities to a third-party operator. In order to provide liquidity to Gulf Coastduring its chapter 11 cases, we have committed to provide up to $25 millionof senior secured debtor-in-possession ("DIP") financing, a portion of which funding is tied to certain milestones, including the transition of the management of the operations of the facilities. The DIP financing is guaranteed by all debtors and is secured by liens on substantially all of their assets, including post-petition accounts receivable, subject in certain cases to other priorities. The Bankruptcy Courthas approved on an interim basis the debtors' borrowing of up to $15.75 millionof DIP financing. The Bankruptcy Courthas scheduled a hearing to consider approval of all borrowings available under the DIP facility on a final basis on November 12, 2021. Omega's collection of unpaid rent due from Gulf Coast, repayment of the DIP financing and ability to offset unpaid rent against amounts due under third-party debt are subject to risks. These include limits that may be applied by the Bankruptcy Courtto Omega's ability to enforce its master lease, the Support Agreement, and DIP financing terms, including any potential caps imposed by the Bankruptcy Code on Omega's rent claims, and the other risks described under the caption "The bankruptcy or insolvency of our operators could limit or delay our ability to recover on our investments" in Part I, Item1A - Risk Factors of our Form 10-K for the year ended December 31, 2020. Omega's ability to transfer and/or sell the leased facilities to third parties may be subject to delays that Omega cannot control. If Omega is unable to transfer and/or sell the leased facilities in a timely manner or for sufficient consideration, we may experience a material adverse effect on our properties, operations, or business.
Other receivables and write-downs on a linear basis
In addition to the
Gulf Coaststraight-line receivable write-off in the second quarter discussed above, during the nine months ended September 30, 2021, we wrote-off straight-line rent receivable balances of $3.4 millionthrough rental income primarily due to placing three other operators (1 operator in the first quarter and 2 operators in the third quarter) on a cash basis of revenue recognition. We determined that collection of substantially all contractual lease payments with these operators was no longer probable for various reasons. The placement of an operator on a cash basis of revenue recognition during the first quarter was because the operator stopped paying contractual rent under our lease agreement. The two operators placed on a cash basis of revenue recognition during the third quarter are current with rent payments as of September 30, 2021. The three operators collectively represent approximately 0.3% and 0.5%, respectively, of our total revenues (excluding the impact of write-offs related to these operators in 2021) for the nine months ended September 30, 2021and 2020.
We continue to closely monitor the performance of all of our operators, as well as general industry trends and developments.
Liquidity and capital resources
47 Table of Contents
Financing activities and borrowing terms
Revolving credit facility
April 30, 2021, Omega entered into a credit agreement (the "2021 Omega Credit Agreement") providing us with a new $1.45 billionsenior unsecured multicurrency revolving credit facility (the "Revolving Credit Facility"), replacing our previous $1.25 billionsenior unsecured 2017 multicurrency revolving credit facility (the "2017 Revolving Credit Facility"). The 2021 Omega Credit Agreement contains an accordion feature permitting us, subject to compliance with customary conditions, to increase the maximum aggregate commitments thereunder to $2.5 billion, by requesting an increase in the aggregate commitments under the Revolving Credit Facility or by adding term loan tranches. The Revolving Credit Facility bears interest at LIBOR (or in the case of loans denominated in GBP, the Sterling overnight index average reference rate plus an adjustment of 0.1193% per annum) plus an applicable percentage (with a range of 95 to 185 basis points) based on our credit ratings. The Revolving Credit Facility matures on April 30, 2025, subject to Omega's option to extend such maturity date for two six-month periods. The Revolving Credit Facility may be drawn in Euros, GBP, Canadian Dollars (collectively, "Alternative Currencies") or U.S.Dollars ("USD"), with a $1.15 billiontranche available in USD and a $300 milliontranche available in Alternative Currencies. For purposes of the Revolving Credit Facility, references to LIBOR include the Canadian dealer offered rates for amounts offered in Canadian Dollars and any other Alternative Currency rate approved in accordance with the terms of the 2021 Omega Credit Agreement for amounts offered in any other non- Londoninterbank offered rate quoted currency, as applicable.
OP Term Loan On
April 30, 2021, Omega OP entered into a credit agreement (the "2021 Omega OP Credit Agreement") providing it with a new $50 millionsenior unsecured term loan facility (the "OP Term Loan"). The OP Term Loan replaces the $50 millionsenior unsecured term loan obtained in 2017 (the "2017 OP Term Loan") and the related credit agreement. The OP Term Loan bears interest at LIBOR plus an applicable percentage (with a range of 85 to 185 basis points) based on our credit ratings. The OP Term Loan matures on April 30, 2025, subject to Omega OP's option to extend such maturity date for two, six-month periods.
March 2021, we issued $700 millionaggregate principal amount of our 3.250% Senior Notes due 2033 (the "2033 Senior Notes"). The 2033 Senior Notes mature on April 15, 2033. The 2033 Senior Notes were sold at an issue price of 99.304% of their face value before the underwriters' discount. We used the proceeds from this offering to pay down outstanding borrowings on the Revolving Line of Credit, repay the Sterling term loan, and fund the tender offer to purchase $350 millionof the 4.375% Senior Notes due 2023 and the payment of accrued interest and related fees, premiums and expenses. In connection with this transaction, we recorded approximately $29.7 millionin related fees, premiums, and expenses which were recorded as Loss on debt extinguishment in our Consolidated Statement of Operations.
Interest rate risk cash flow hedges
We enter into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our fixed-rate payments. These interest rate swap agreements are used to hedge the variable cash flows associated with variable-rate debt. 48
March 27, 2020, we entered into five forward starting swaps totaling $400 million. We designated the forward starting swaps as cash flow hedges of interest rate risk associated with interest payments on a forecasted issuance of fixed rate long-term debt, initially expected to occur within the next five years. The swaps are effective on August 1, 2023and expire on August 1, 2033and were issued at a fixed rate of approximately 0.8675%. In March 2021, in conjunction with the issuance of $700 millionaggregate principal amount of our 3.25% Senior Notes due 2033, we discontinued hedge accounting for these five forward starting swaps. Amounts reported in accumulated other comprehensive income ("AOCI") related to these discontinued cash flow hedging relationships will be reclassified to interest expense over a ten-year term. Simultaneously, we re-designated these swaps in new cash flow hedging relationships of interest rate risk associated with interest payments on another forecasted issuance of long-term debt. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 46 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments). In addition to the forward swaps discussed above, we also have two interest rate swaps that were entered into in May 2019with aggregate notional amounts of $50.0 million. These interest rate swaps are designated as hedges against our exposure to changes in interest payment cash flow fluctuations in the variable interest rates on the OP Term Loan.
Foreign exchange forward contracts and debt designated as net investment hedges
British pound ("GBP") denominated borrowings under the Sterling term loan and the 2017 Revolving Credit Facility, were previously used to hedge a portion of our investments in the
U.K.against fluctuations in GBP against the USD. The GBP denominated borrowings under both debt instruments were deemed an effective hedge from there issuance in May 2017until the settlement of the Sterling term loan and the repayment of the GBP denominated borrowings under the 2017 Revolving Credit Facility in March 2021. Gains and losses associated with these nonderivative net investment hedges were recorded in foreign currency translation within other comprehensive income (loss) ("OCI"). Concurrent with the settlement of the GBP denominated debt, we entered into four foreign currency forwards with notional amounts totaling Â£174.0 million, that mature on March 8, 2024, to hedge a portion of our net investments in the U.K., effectively replacing the terminated net investment hedge. The gains and losses associated with these foreign currency forwards are also recorded in foreign currency translation within OCI. Amounts associated with these net investment hedges would be reclassified out of AOCI into earnings when our hedged net investment in the U.K.is either sold or substantially liquidated.
Additional information about the guarantor
Parent has issued approximately
$4.9 billionaggregate principal of senior notes outstanding at September 30, 2021that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP. The SECadopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the outstanding senior notes, the Revolving Credit Facility and the OP Term Loan) and their investments in non-guarantor subsidiaries. Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As of September 30, 2021, there were no significant restrictions on the ability of Omega OP to make distributions to Omega. 49 Table of Contents
Market offer programs
During the third quarter of 2015, Omega entered into Equity Distribution Agreements with several financial institutions to sell
$500.0 millionof shares of common stock from time to time through an "at-the-market" ("ATM") offering program (the "2015 ATM Program"). During the second quarter of 2021, the we terminated the 2015 ATM Program and entered into a new ATM Equity Offering Sales Agreement pursuant to which shares of common stock having an aggregate gross sales price of up to $1.0 billion(the "2021 ATM Program") may be sold from time to time (i) by Omega through several financial institutions acting as a sales agent or directly to the financial institutions as principals, or (ii) by several financial institutions acting as forward sellers on behalf of any forward purchasers pursuant to a forward sale agreement. Under the 2021 ATM Program, compensation for sales of the shares will not exceed 2% of the gross sales price per share for shares sold through each financial institution. The use of forward sales under the 2021 ATM Program generally allows Omega to lock in a price on the sale of shares of common stock when sold by the forward sellers but defer receiving the net proceeds from such sales until the shares of our common stock are issued at settlement on a later date. We did not utilize the forward provisions under the 2021 ATM Program during the second or third quarter of 2021. The table below presents information regarding the shares issued under the 2021 and 2015 ATM Programs for the three and nine months ended September 30, 2020and 2021: Shares issued Average Net Price Gross Proceeds Commissions Net Proceeds Period Ended (in millions) Per Share(1) (in millions) Three Months Ended September 30, 2020 - $ - $ - $ - $ - Three Months Ended September 30, 2021 0.1 32.82 1.3 0.1 1.2 Nine Months Ended September 30, 2020 0.1 34.64 2.0 0.3 1.7 Nine Months Ended September 30, 2021 4.2 36.56 155.1 3.3 151.8
(1) Represents the average price per share after commissions.
Dividend Reinvestment and Common Share Purchase Plan
The table below presents information regarding the shares issued under the dividend reinvestment and common share purchase plan for the three and nine months ended.
Shares issued Gross Proceeds Period Ended (in millions) (in millions) Three Months Ended September 30, 2020 - $ - Three Months Ended September 30, 2021 1.3 47.2 Nine Months Ended September 30, 2020 0.1 3.7 Nine Months Ended September 30, 2021 3.3 124.5 50 Table of Contents Commitments We have committed to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. We expect the funding of these commitments to be completed over the next several years. Our remaining commitments at
September 30, 2021, are outlined in the table below (in thousands): Total commitments (1) $ 743,154Amounts funded to date (2) (502,020) Remaining commitments (3) $ 241,134
Management report and analysis of the financial position and results of
Operations – Portfolio and recent developments.
(2) Includes financial charges.
(3) This amount excludes our remaining commitments to be financed under our other
investments of about
As a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 90% of our "REIT taxable income" (computed without regard to the dividends paid deduction and our net capital gain), and (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. In addition, if we dispose of any built-in gain asset during a recognition period, we will be required to distribute at least 90% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration. In addition, such distributions are required to be made pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class of stock as compared with another class except to the extent that such class is entitled to such a preference. To the extent that we do not distribute all of our net capital gain or do distribute at least 90%, but less than 100% of our "REIT taxable income" as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates. For the nine months ended
September 30, 2021, we paid dividends of approximately $477.1 millionto our common stockholders. On February 16, 2021, we paid dividends of $0.67per outstanding common share to the common stockholders of record as of the close of business on February 8, 2021. On May 17, 2021, we paid dividends of $0.67per outstanding common share to the common stockholders of record as of the close of business on May 3, 2021. On August 13, 2021, we paid dividends of $0.67per outstanding common share to the common stockholders of record as of the close of business on August 2, 2021. On November 15, 2021, we will pay dividends of $0.67per outstanding common share to the common stockholders of record as of the close of business on November 5, 2021.
We believe our liquidity and various sources of available capital, including cash from operations, our existing availability under our credit facilities, existing equity sales programs, facility sales and expected proceeds from mortgage and other investment payoffs are adequate to finance operations, meet recurring debt service requirements and fund future investments through the next twelve months.
We regularly review our liquidity needs, the adequacy of operating cash flows and other sources of liquidity expected to meet those needs. We believe that our main short-term liquidity needs are to finance:
? normal recurring expenses; ? debt service payments;
? capital improvement programs;
? dividends in ordinary shares; and
? growth through the acquisition of additional buildings.
51 Table of Contents The primary source of liquidity is our cash flows from operations. Operating cash flows have historically been determined by: (i) the number of facilities we lease or have mortgages on; (ii) rental and mortgage rates; (iii) our debt service obligations; (iv) general and administrative expenses and (v) our operators' ability to pay amounts owed. The timing, source and amount of cash flows provided by or used in financing activities and in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in the capital markets environment may impact the availability of cost-effective capital and affect our plans for acquisition and disposition activity.
Total cash, cash equivalents and restricted cash
Operating Activities - Operating activities generated
$565.6 millionof net cash flow for the nine months ended September 30, 2021, as compared to $510.9 millionfor the same period in 2020, an increase of $54.7 million, which is primarily driven by an increase of $59.4 millionof net income, adjusted for non-cash items, due to revenue growth as a result of facility acquisitions and transitions, investments in mortgages and other investments. A $4.7 millionchange in the net movements of the operating assets and liabilities, primarily driven by a reduction in lease inducements provided to our operators, also contributed to the overall increase in cash provided by operating activities. Investing Activities - Net cash flow from investing activities was an outflow of $452.2 millionfor the nine months ended September 30, 2021, as compared to an outflow of $56.0 millionfor the same period in 2020. The $396.2 millionchange in cash flow from investing activities related primarily to (i) a $588.7 millionincrease in real estate acquisitions driven by the acquisition of 24 senior living facilities from Healthpeak Properties, Inc. for $511.3 millionin the first quarter of 2021, (ii) a $8.3 millionincrease in investments in unconsolidated joint ventures and (iii) a $31.9 millionincrease in investment in construction in progress and capital expenditures, offset by (i) a $193.7 millionincrease in proceeds from the sales of real estate investments, (ii) a $15.9 millionincrease in mortgages collections, net of placements, (iii) $14.6 millionincrease in other investment proceeds, net of new investments, (iv) a $5.6 millionincrease in receipts from insurance proceeds and (v) a $2.5 millionrefund of an acquisition related deposit in the first quarter of 2021. Financing Activities - Net cash flow from financing activities was an outflow of $175.0 millionfor the nine months ended September 30, 2021, as compared to an outflow of $447.5 millionfor the same period in 2020. The $272.5 millionchange in cash flow from financing activities was primarily related to (i) a $271.0 millionincrease in cash proceeds from the issuance of common stock in 2021 due to increased issuances under our Dividend Reinvestment and Common Stock Purchase Plan and our 2015 and 2021 ATM Programs, as compared to the same period in 2020 and (ii) $70.6 millionincrease in proceeds from other long-term borrowings, net of repayments offset by (i) a $48.0 millionincrease in payment of financing related costs and (ii) a $17.3 millionincrease in dividends paid.
Critical accounting conventions 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, 2020. There have been no material changes to our critical accounting policies or estimates since December 31, 2020.
Â© Edgar online, source