OMEGA HEALTHCARE INVESTORS INC (OHI)

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is based primarily on the consolidated financial statements of Omega Healthcare Investors, Inc. presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in “Forward-Looking Statements” and “Item 1A – Risk Factors” above.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

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Business Overview

Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries 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, Omega OP. As of December 31, 2024, 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.

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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 skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of 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 that 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.

Our portfolio of real estate investments (including properties associated with mortgages, direct financing leases, assets held for sale and consolidated joint ventures) at December 31, 2024, included 1,026 healthcare facilities, located in 42 states and the U.K. that are operated by 87 third-party operators. Our real estate investment in these facilities, net of impairments and allowances, totaled approximately $10.1 billion at December 31, 2024, with approximately 98% of our real estate investments related to long-term healthcare facilities. The portfolio is made up of (i) 589 SNFs, (ii) 290 ALFs, (iii) 19 ILFs, (iv) 18 specialty facilities, (v) one MOB, (vi) real estate loans, including mortgages on 52 SNFs, 43 ALFs, one specialty facility and one ILF and (vii) 12 facilities that are held for sale. At December 31, 2024, we also held other real estate loans (excluding mortgages) receivable of $485.5 million and non-real estate loans receivable of $332.3 million, consisting primarily of secured loans to third-party operators of our facilities, and $88.7 million of investments in 11 unconsolidated joint ventures, which comprise 5 SNFs, one ALF and one specialty facility.

As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success. As part of our evaluation, we may from time to time consider selling or transitioning assets that do not meet our portfolio criteria.

Outlook, Trends and Other Conditions

Our industry continues to recover from the impacts 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. While certain of our operators have experienced a level of recovery from pandemic-driven challenges such as occupancy declines, labor shortages, staffing expense increases, and other cost increases, certain of our other operators remain negatively impacted by these factors in a much more profound way. In addition, our operators have been and continue to be adversely affected by inflation-related cost increases, which may exacerbate labor shortages and increase labor costs, among other impacts, and may be adversely impacted by immigration restrictions and changes to immigration enforcement policy to the extent they contribute to labor shortages. There continues to be uncertainty regarding the duration of these impacts for those operators, 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. In addition, there remains uncertainty as to 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 Item 1 – Business – Government Regulation and Reimbursement for additional information.

We continue to monitor these impacts as well as the impacts of other regulatory changes, as discussed in Item 1 – Business – Government Regulation and Reimbursement, including any significant limits on the scope of services 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. As discussed further in “Collectibility Issues” below, in 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 payment deferrals, lease and portfolio restructurings and/or allowed several operators to apply security deposits or letters of credit to pay rent. 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 noted above may continue to have an impact on certain of our operators and their financial conditions.

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2024 and Recent Highlights

Investments

Dispositions and Impairments

Financing Activities

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Other Highlights

Collectibility Issues

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Dividends

Results of Operations

The following is our discussion of the consolidated results of operations for the year ended December 31, 2024 as compared to the year ended December 31, 2023. For a discussion of our results of operation for the year ended December 31, 2023 as compared to the year ended December 31, 2022, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”).

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Comparison of results of operations for the years ended December 31, 2024 and 2023 (dollars in thousands):

Revenues

Following is a description of certain of the changes in revenues for the year ended December 31, 2024 compared to 2023:

Expenses

Following is a description of certain of the changes in our expenses for the year ended December 31, 2024 compared to 2023:

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Other Income (Expense)

The decrease in total other income (expense) was primarily due to (i) a $66.5 million decrease in gain on assets sold resulting from the sale of 21 facilities in 2024 compared to the sale of 69 facilities in 2023 as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio and (ii) a $13.5 million change in other income (expense) – net primarily related to decreased interest income on short-term investments due to lower invested cash in 2024 and foreign currency and fair value losses on financial instruments 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 including our acquisition of the remaining 51% interest in the Cindat Joint Venture in July 2024.

Income (Loss) from Unconsolidated Joint Ventures

The change in income (loss) income from unconsolidated joint ventures was primarily due to one unconsolidated joint venture, OMG Senior Holdings, LLC, which sold one facility during the third quarter of 2024 for a $12.9 million gain ($6.5 million of which represents the Company’s share of the gain).

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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.

The following table presents our Nareit FFO reconciliation for the years ended December 31, 2024, 2023 and 2022:

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 2024 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).

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Capital Structure

At December 31, 2024, we had total assets of $9.9 billion, total equity of $4.7 billion and total debt of $4.9 billion in our consolidated financial statements, with such debt representing approximately 50.7% of total capitalization.

Debt

At December 31, 2024 and 2023, the weighted average annual interest rate of our debt was 4.6% and 4.4%, respectively. Additionally, as of December 31, 2024, approximately 95% of our debt with outstanding principal balances has fixed interest payments after reflecting the impact of interest rate swaps that are designated cash flow hedges. As of December 31, 2024, Omega’s debt obligations consisted of the following:

As of December 31, 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.

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As of December 31, 2024, we had $400 million of 4.50% senior notes due January 2025 (which were repaid on January 15, 2025 using available cash). Our Revolving Credit Facility, OP Term Loan and 2025 Term Loan also mature in 2025. As noted above, we have remaining options under each of these loans to extend the maturity dates beyond 2025. We will evaluate market conditions during the course of 2025 and determine if it is advantageous to further extend the terms of, refinance and/or pay off these loans. As of December 31, 2024, we had approximately $518.3 million of cash and cash equivalents on our Consolidated Balance Sheets and $1.45 billion of availability under our Revolving Credit Facility. Our next senior note maturity is the $600 million of 5.25% senior notes due January 2026. As discussed below, we also have $821.0 million of potential sales remaining under the ATM Program. This combination of liquidity sources, along with cash from operating activities, provides us with ability to repay the senior notes due in January 2026. We also could elect to refinance these notes based on our evaluation of market conditions at maturity.

Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of December 31, 2024 and 2023, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

Equity

At December 31, 2024, we had 279,129 thousand shares of common stock outstanding, and our shares had a market value of $10.6 billion. As of December 31, 2024, we had the following equity programs in place that we can utilize to raise capital:

Dividends

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

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Material Cash Requirements

The following table shows our material cash requirements, described below, as of December 31, 2024:

Capital Expenditures and Funding Commitments

In addition to the obligations in the table above, as of December 31, 2024, we also had $221.8 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. Additionally, we have commitments to fund $50.4 million of advancements under existing other real estate loans and $65.7 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.

Other Arrangements

We own interests in certain unconsolidated joint ventures as described in Note 11 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 also hold variable interests in certain unconsolidated entities through our loan and other investments. See disclosures regarding our risk of loss associated with these entities within Note 10 to the Consolidated Financial Statements – Variable Interest Entities.

We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 to the Consolidated Financial Statements – Derivatives and Hedging.

Cash Flow Summary

The following is a summary of our sources and uses of cash flows for the year ended December 31, 2024 as compared to the year ended December 31, 2023 (dollars in thousands):

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For a discussion of our consolidated cash flows for the year ended December 31, 2023 as compared to the year ended December 31, 2022, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K.

Cash, cash equivalents and restricted cash totaled $548.7 million as of December 31, 2024, an increase of $104.0 million as compared to the balance at December 31, 2023. The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.

Operating Activities –The increase in net cash provided by operating activities is primarily driven by an increase of $83.7 million of net income, net of $85.3 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 $48.0 million change in the net movements of the operating assets and liabilities also contributed to the overall increase in cash provided by operating activities.

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Investing Activities –The increase in cash used in investing activities related primarily to (i) a $490.0 million decrease in proceeds from the sales of real estate investments due to significant restructuring activities related to Guardian and LaVie in 2023, (ii) a $146.2 million increase in real estate acquisitions driven by several large portfolio acquisitions in the U.K. in 2024, (iii) a $24.2 million increase in capital improvements to real estate investments and construction in progress primarily as a result of on-going construction of an ALF in Washington D.C., (iv) a $7.8 million decrease in distributions from unconsolidated joint ventures in excess of earnings, (v) a $7.0 million increase in loan placements, net of repayments due to new loans advanced in 2024 partially offset by significant paydowns on loans during 2024, (vi) a $3.7 million decrease in receipts from insurance proceeds and (vii) a $2.9 million decrease in proceeds from net investment hedges, partially offset by an $11.4 million decrease in investments in unconsolidated joint ventures.

Financing Activities –The change in cash provided by (used in) financing activities was primarily related to a $899.2 million increase in cash proceeds from the issuance of common stock as a result of increased volume under our ATM Program and DRSCPP, partially offset by (i) a $259.6 million increase in repayments on other long-term borrowings, net of proceeds, primarily due to repayment of $400 million of 4.95% senior notes in April 2024, (ii) a $92.6 million decrease in proceeds from derivative instruments as a result of the termination of our forward starting swaps in the second quarter of 2023, (iii) a $41.6 million increase in dividends paid primarily related to share issuances during 2024, (iv) a $3.2 million increase in payment of financing related costs related to costs incurred in connection with the assumption of the 2026 Mortgage Loan as part of our acquisition of the remaining 51% interest in the Cindat Joint Venture and (v) a $2.9 million increase in distributions to Omega OP Unit holders.

Supplemental Guarantor Information

Parent has issued approximately $4.2 billion aggregate principal of senior notes outstanding at December 31, 2024 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP.

The SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the outstanding senior notes, 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 December 31, 2024, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies were followed in preparing the Consolidated Financial Statements for all periods presented. Actual results could differ from those estimates.

We have identified the following accounting policies that we believe are critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant assumptions, judgments and estimates. With respect to these critical accounting policies, we believe the application of assumptions, judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:

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Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is based primarily on the consolidated financial statements of Omega Healthcare Investors, Inc. presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in “Forward-Looking Statements” and “Item 1A – Risk Factors” above.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

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Business Overview

Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries 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, Omega OP. As of December 31, 2023, 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.

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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 skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of 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.

Our portfolio of real estate investments (including properties associated with mortgages, direct financing leases, assets held for sale and consolidated joint ventures) at December 31, 2023, included 891 healthcare facilities, located in 42 states and the U.K. that are operated by 74 third-party operators. Our real estate investment in these facilities, net of impairments and allowances, totaled approximately $9.1 billion at December 31, 2023, with approximately 97% of our real estate investments related to long-term healthcare facilities. The portfolio is made up of (i) 592 SNFs, (ii) 188 ALFs, (iii) 19 ILFs, (iv) 19 specialty facilities, (v) one MOB, (vi) real estate loans, including mortgages on 45 SNFs, seven ALFs, two specialty facilities and one ILF and (vii) 17 facilities that are held for sale. At December 31, 2023, we also held other real estate loans (excluding mortgages) receivable of $513.4 million and non-real estate loans receivable of $275.6 million, consisting primarily of secured loans to third-party operators of our facilities, and $188.4 million of investments in nine unconsolidated joint ventures, which comprise 5 SNFs, 64 ALFs and two specialty facilities.

As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success. As part of our evaluation, we may sometimes consider selling or transitioning assets that do not meet our portfolio criteria.

Outlook, Trends and Other Conditions

Our industry continues to face the long-term impacts 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 cost increases which continue to significantly impact our operators post-pandemic. As discussed further in “Collectibility Issues” below, during the year we have had several operators that have failed to make contractual payments under their lease and loan agreements, and we have agreed to short-term deferrals, lease and portfolio restructurings and/or allowed the application of security deposits or letters of credit to pay rent for several operators.

We believe these operators were impacted by reduced revenue as a result of lower occupancy, increased expenses, uncertainties regarding adequate reimbursement levels and changes to government and regulatory financial support, among other things. The expense increases were offset to some extent by enhanced reimbursement due to skilling in place, which was permitted via waiver during the pandemic, but which was discontinued when the federally declared public health emergency expired on May 11, 2023. We believe the expense increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay and reliance on agency staffing due to labor shortages, as well as implementation of new infection control protocols. In addition, operators who do not achieve full compliance with applicable infection control requirements may face potential survey deficiencies and penalties. At this time, there is uncertainty regarding the ultimate impact of such developments.

We remain cautious as some of these factors may continue to have a significant impact on our operators and their financial conditions, particularly given the staffing shortages that continue to impact our operators’ occupancy levels and profitability, uncertainty as to whether Medicare and Medicaid reimbursement rates will be sufficient to address longer-term cost increases faced by operators, uncertainty regarding the ultimate scope and impact of proposed U.S. federal minimum staffing rules for our industry, factors that may impact future virus transmission in our facilities, including vaccination rates and efficacy of the vaccine for staff members and residents at our facilities and the risk of future infectious diseases or pandemics.

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Our facilities, on average, experienced declines in occupancy levels as a result of the pandemic, in some cases that were material. Occupancy in our facilities has generally improved on average since early 2021; however, average occupancy has not returned to pre-pandemic levels. It remains unclear when and the extent to which demand and occupancy levels will return to pre-pandemic 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 the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs.

While substantial government support was allocated to SNFs, and to a lesser extent to ALFs, in 2020, U.S. federal relief efforts have been limited since 2021 as have been relief efforts in certain states. The additional 6.2% Medicaid Federal Medical Assistance Percentage (the “FMAP”) reimbursement enacted in connection with the pandemic was phased out in 2023 pursuant to the Consolidated Appropriations Act of 2023. The additional 6.2% FMAP provided some of our operators with significant support, based on the state, and the termination of such support may adversely affect their operations to the extent that normal rate setting does not adjust for this phase-out or expenses are not reduced. It is unclear whether and to what extent government reimbursements will continue to be sufficient and timely to offset these impacts or whether proposed U.S. federal minimum staffing rules for SNFs, if not accompanied by additional government funding, will further increase expenses for our operators.

While certain states have provided pandemic-related relief measures, we expect such state relief measures to be limited going forward. Likewise, while certain states have, in the course of routine rate-setting of Medicaid rates, addressed inflationary factors and other expense-related items, there can be no assurance that these changes will be sufficient to offset increased inflation and expenses or that all states will address these items. See “Government Regulation and Reimbursement” for additional information. Further, 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.

There are a number of uncertainties we face as we consider the effects of the industry’s recovery on our business, including how long census disruption and elevated costs will last, the continued management of infectious diseases in our facilities, the extent to which reimbursement increases from the federal government, the states and the U.K. will continue to offset these incremental costs, and lost revenues.

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, the duration of such increased costs, the adequacy of government reimbursement increases to cover such costs, 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.

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 labor shortages and increased labor costs, as well as other inflation-related cost increases.

We continue to monitor 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.

2023 and Recent Highlights

Investments

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Dispositions and Impairments

Financing Activities

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Other Highlights

Collectibility Issues

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Dividends

Results of Operations

The following is our discussion of the consolidated results of operations for the year ended December 31, 2023 as compared to the year ended December 31, 2022. For a discussion of our results of operation for the year ended December 31, 2022 as compared to the year ended December 31, 2021, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”).

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Comparison of results of operations for the years ended December 31, 2023 and 2022 (dollars in thousands):

Revenues

Following is a description of certain of the changes in revenues for the year ended December 31, 2023 compared to 2022:

Expenses

Following is a description of certain of the changes in our expenses for the year ended December 31, 2023 compared to 2022:

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Other Income (Expense)

The decrease in total other income (expense) was primarily due to a $280.3 million decrease in gain on assets sold resulting from the sale of 69 facilities in 2023 compared to the sale of 66 facilities in 2022 as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio, partially offset by a $22.3 million change in other income (expense) – net primarily related to increased interest income on short-term investments due to higher invested cash and favorable interest rates in 2023.

Income from Unconsolidated Joint Ventures

The change in (loss) income from unconsolidated joint ventures was primarily due to higher interest rates on outstanding debt and fair value adjustments on our derivative instruments within our Cindat Joint Venture.

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.

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

The following table presents our Nareit FFO reconciliation for the years ended December 31, 2023, 2022 and 2021:

The $130.6 million increase in Nareit FFO for the year ended December 31, 2023 compared to 2022 is primarily driven by the overall increase in total revenue, the decrease in acquisition, merger and transition related costs and the decrease in provision for credit losses which are discussed in more detail in the Results of Operations above.

Liquidity and Capital Resources

Sources and Uses

Our primary sources of cash include rental income and interest payment receipts on our loans, existing availability under our Revolving Credit Facility, proceeds from our DRSPP and 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 meet our principal 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 December 31, 2023, we had total assets of $9.1 billion, total equity of $3.8 billion and total debt of $5.1 billion in our consolidated financial statements, with such debt representing approximately 57.6% of total capitalization.

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Debt

At December 31, 2023 and 2022, the weighted average annual interest rate of our debt was 4.4% and 4.1%, respectively. Additionally, as of December 31, 2023, approximately 99% of our debt obligations, with outstanding principal balances, have fixed interest payments, after reflecting the impact of interest rate swaps that are designated cash flow hedges. As of December 31, 2023, Omega’s debt obligations consisted of the following:

As of December 31, 2023, 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 and S&P Global 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 December 31, 2023, we have $400 million of 4.95% senior notes due April 2024. As of December 31, 2023, we had approximately $442.8 million of cash and cash equivalents on our Consolidated Balance Sheets and $1.4 billion of availability under our revolving credit facility. As discussed below, we also have $708.2 million of potential sales remaining under the ATM Program. This combination of liquidity sources, along with cash from operating activities, provides us with ability to repay the senior notes due in April 2024.

Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of December 31, 2023 and 2022, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

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Equity

At December 31, 2023, we had 245.3 million shares of common stock outstanding and our shares had a market value of $7.5 billion. As of December 31, 2023, we had the following equity programs in place that we can utilize to raise capital:

Dividends

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

Material Cash Requirements

The following table shows our material cash requirements, described below, as of December 31, 2023:

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Capital Expenditures and Funding Commitments

In addition to the obligations in the table above, as of December 31, 2023, we also had $191.9 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. Additionally, we have commitments to fund $46.3 million of advancements under existing other real estate loans and $46.2 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.

Other Arrangements

We own interests in certain unconsolidated joint ventures as described in Note 11 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 also hold variable interests in certain unconsolidated entities through our loan and other investments. See disclosures regarding our risk of loss associated with these entities with Note 10 to the Consolidated Financial Statements – Variable Interest Entities.

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We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 to the Consolidated Financial Statements – Derivatives and Hedging.

Cash Flow Summary

The following is a summary of our sources and uses of cash flows for the year ended December 31, 2023 as compared to the year ended December 31, 2022 (dollars in thousands):

For a discussion of our consolidated cash flows for the year ended December 31, 2022 as compared to the year ended December 31, 2021, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K.

Cash, cash equivalents and restricted cash totaled $444.7 million as of December 31, 2023, an increase of $144.1 million as compared to the balance at December 31, 2022. The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.

Operating Activities –The decrease in net cash provided by operating activities is primarily driven by a $30.6 million change in the net movements of the operating assets and liabilities. The decrease was partially offset by an increase of $22.6 million of net income, net of $212.6 million of non-cash items, primarily due to a year over year increase in rental income and decrease in acquisition, merger and transition related costs, as discussed in our material changes analysis under Results of Operations above.

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Investing Activities –The change in cash used in (provided by) investing activities related primarily to (i) a $229.1 million decrease in loan repayments, net of placements due to significant paydowns on the Ciena Healthcare mortgage loans and other loans during 2022, (ii) a $174.0 million decrease in proceeds from the sales of real estate investments driven by the sale of the Gulf Coast facilities in the first quarter of 2022, (iii) a $32.5 million increase in real estate acquisitions, (iv) an $18.2 million increase in capital improvements to real estate investments and construction in progress related to a Washington D.C. development with Maplewood and (v) a $12.2 million increase in investments in unconsolidated joint ventures primarily related to the four new joint venture investments in the second and third quarters of 2023. Offsetting these changes were: (i) an $11.4 million increase in proceeds from net investment hedges related to the termination of two foreign currency forwards during the fourth quarter of 2023, (ii) a $5.5 million increase in receipts from insurance proceeds from claims on damaged facilities and (iii) a $5.5 million increase in distributions from unconsolidated joint ventures in excess of earnings.

Financing Activities –The change in cash used in financing activities was primarily related to (i) a $328.3 million increase in cash proceeds from the issuance of common stock, (ii) a $142.3 million decrease in repurchases of shares of common stock, (iii) 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 and (iv) a $9.6 million decrease in redemptions of OP units, partially offset by (i) a $236.0 million increase in repayments on other long-term borrowings, net of proceeds, primarily due to the early pay-off of 32 HUD mortgage loans during 2023, (ii) an $11.0 million increase in dividends paid primarily related to share issuances during 2023, (iii) a $5.9 million increase in distributions to Omega OP Unit holders and (iv) a $3.4 million increase in payment of financing related costs related to the Company entering into the 2025 Term Loan during the third quarter of 2023.

Supplemental Guarantor Information

Parent has issued approximately $4.6 billion aggregate principal of senior notes outstanding at December 31, 2023 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP.

The SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the outstanding senior notes, 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 December 31, 2023, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies were followed in preparing the Consolidated Financial Statements for all periods presented. Actual results could differ from those estimates.

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We have identified the following accounting policies that we believe are critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant assumptions, judgments and estimates. With respect to these critical accounting policies, we believe the application of assumptions, judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:

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Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is based primarily on the consolidated financial statements of Omega Healthcare Investors, Inc. presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in “Forward-Looking Statements” and “Item 1A – Risk Factors” above.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

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Business Overview

Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries 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, Omega OP. As of December 31, 2022, Parent owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and other investors owned approximately 3% of the outstanding Omega OP Units.

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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 skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of 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.

Our portfolio of real estate investments (including properties associated with mortgages, direct financing leases, assets held for sale and consolidated joint ventures) at December 31, 2022, included 926 healthcare facilities, located in 42 states and the U.K. that are operated by 67 third-party operators. Our real estate investment in these facilities totaled approximately $9.5 billion at December 31, 2022, with approximately 97% of our real estate investments related to long-term healthcare facilities. The portfolio is made up of (i) 665 SNFs, (ii) 169 ALFs, (iii) 20 ILFs, (iv) 16 specialty facilities, (v) two MOBs, (vi) real estate loans, including mortgages on 48 SNFs, two ALFs and two specialty facilities and (vii) two facilities that are held for sale. At December 31, 2022, we also held other real estate loans (excluding mortgages) receivable of $394.6 million and non-real estate loans receivable of $225.3 million, consisting primarily of secured loans to third-party operators of our facilities, and $178.9 million of investments in six unconsolidated joint ventures.

As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success. Our strategy includes applying data analytics to our investment underwriting and asset management, as well as selling or transitioning assets that do not meet our portfolio criteria.

Outlook, Trends and Other Conditions

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; in addition, the pandemic contributed to occupancy declines, labor shortages and cost increases which continue to significantly impact our operators. As discussed further in “Collectibility Issues” below, during the year we have had several operators that have failed to make contractual payments under their lease and loan agreements, and we have agreed to short-term deferrals, lease and portfolio restructurings and/or allowed the application of security deposits or letters of credit to pay rent for several operators.

We believe these operators were impacted by, among other things, reduced revenue as a result of lower occupancy and increased expenses resulting from the COVID-19 pandemic and uncertainties regarding the continuing availability of sufficient government support and adequate reimbursement levels. These increases have been offset to some extent by increases in reimbursements due to increased skilling in place, which has been necessitated by pandemic-related protocols and may decrease when such protocols subside or when the federally declared public health emergency expires as scheduled on May 11, 2023. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay and reliance on agency staffing due to staffing shortages, as well as a significant increase in both the cost and usage of personal protective equipment (“PPE”), testing equipment and processes and supplies, as well as implementation of new infection control protocols and vaccination programs. In addition, operators who do not achieve full compliance with applicable vaccination and infection control requirements may face potential survey issues and penalties. At this time, there is significant uncertainty regarding the impact of such developments.

We remain cautious as the COVID-19 pandemic continues to have a significant impact on our operators and their financial conditions, particularly given the trend of reduced pandemic-related federal support to our operators beginning in 2021, the persistence of staffing shortages that continue to impact our operators’ occupancy levels and profitability, uncertainty as to whether Medicare and Medicaid reimbursement rates will be sufficient to address longer-term cost increases faced by operators, factors that may impact future virus transmission in our facilities, including vaccination rates and efficacy of the vaccine for staff members and residents at our facilities and genetic mutations of the virus into new variants, and the commencement in December 2021 of repayment of deferred FICA obligations.

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We believe that the incidence and severity of COVID-19 among our operators’ residents and employees, based on reporting by our operators, tend to correlate with levels of incidence and severity experienced by the applicable community in which such operators’ are located, and it remains uncertain whether certain of our facilities will be impacted by future community spread of the virus.

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Our facilities, on average, experienced declines, in some cases that are material, in occupancy levels as a result of the pandemic. Occupancy in our facilities has generally improved on average since early 2021; however, average occupancy has not returned to pre-pandemic levels. It remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels. We believe these challenges to occupancy recovery may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.

While substantial government support was allocated to SNFs and to a lesser extent to ALFs in 2020, federal relief efforts have been limited since 2021 as have been relief efforts in certain states. The additional 6.2% FMAP reimbursement in connection with the pandemic is being phased out in 2023 pursuant to the Consolidated Appropriations Act of 2023 as further discussed under “Government Regulation – Reimbursement Changes Related to COVID-19” under “Item 1 – Business.” The additional 6.2% FMAP provided some of our operators with significant support, based on which states they are located in, and the phase out of such support may adversely affect their operations to the extent that expenses are not reduced or other support is not provided. We believe further government support will be needed to continue to offset these impacts on operators, which could be in the form of direct support or reimbursement rate adjustments to reflect sustained cost changes experienced by operators. It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts. In particular, while $25.5 billion in federal funding for healthcare providers impacted by COVID-19 was announced in September 2021 with distributions beginning in late 2021 pursuant to the Public Health and Social Services Emergency Fund (“Provider Relief Fund”), we do not expect additional Provider Relief Funds to be allocated to healthcare operators or our operators, and it remains uncertain whether additional Medicaid funds under the American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) or other changes in Medicare or Medicaid reimbursement rates in the U.S., or U.K. reimbursement and relief programs for our U.K. operators, will ultimately support reimbursement to our operators. While certain states have provided pandemic-related relief measures and/or reimbursement increases, there remains uncertainty as to how widespread these measures will continue to be and to what extent they may be distributed to and benefit our operators, especially when the federally declared public health emergency expires as scheduled on May 11, 2023 or previously released federal funds to states have been fully utilized. Likewise, while certain states may in the course of routine rate-setting of Medicaid rates address inflationary factors and other expense-related items, there can be no assurance that these changes will be sufficient to offset existing increased inflation and expenses or that all states will address these items. See the “Government Regulation and Reimbursement” section for additional information. Further, to the extent the cost and occupancy impacts on our operators continue or accelerate and are not offset by continued government relief or reimbursement rates that are sufficient and timely, we anticipate that the operating results of additional operators may be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place.

There are a number of uncertainties we face as we consider the continuing impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last, the ability of our operators to manage the impact of the termination of public health emergency and temporary relief thereunder, the continued efficacy of vaccination programs in reducing the spread and severity of COVID-19 in our facilities, the impact of genetic mutations of the virus into new variants on our facilities, and the extent to which funding support from the federal government, the states and the U.K. 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.

In addition to the impacts of COVID-19 discussed above, our operators have been and are likely to continue to be adversely affected by labor shortages and increased labor costs as well as other inflation-related cost increases. In addition, our operations have also been and are likely to continue to be impacted by increased competition for the acquisition of facilities in the U.S., which has decreased the number of investment opportunities that would be accretive to our portfolio. As part of our continuous evaluation of our portfolio and in connection with certain operator restructuring transactions, we expect to continue to opportunistically sell assets, or portfolios of assets, from time to time.

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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.

2022 and Recent Highlights

Investments

Dispositions and Impairments

Financing Activities

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Other Highlights

Collectibility Issues

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Dividends

Results of Operations

The following is our discussion of the consolidated results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021. For a discussion of our results of operation for the year ended December 31, 2021 as compared to the year ended December 31, 2020, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”).

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Comparison of results of operations for the years ended December 31, 2022 and 2021 (dollars in thousands):

Revenues

Following is a description of certain of the changes in revenues for the year ended December 31, 2022 compared to 2021:

Expenses

Following is a description of certain of the changes in our expenses for the year ended December 31, 2022 compared to 2021:

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●The decrease in provision for credit losses primarily relates to a net decrease in aggregate specific provisions recorded in 2022 compared to specific provisions recorded in 2021, partially offset by increases in the general reserve recorded primarily resulting from increases in loss rates utilized in the estimate of expected losses for loans (see Note 9 – Allowance for Credit Losses to the Consolidated Financial Statements for a full summary of allowance movements over the last three years).

Other Income (Expenses)

The increase in total other income (expense) was primarily due to (i) a $198.3 million increase in gain on assets sold resulting from the sale of 66 facilities in 2022 compared to the sale of 48 facilities in 2021 as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio and (ii) a $30.4 million decrease in loss on debt extinguishment primarily related to fees, premiums, and expenses related to the early redemption of $350 million of principal of the 4.375% Senior Notes due 2023 during the first quarter of 2021.

Income Tax Expense

As a REIT, we generally are not subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. For tax year 2022, we made common dividend payments of $632.9 million to satisfy REIT requirements relating to qualifying income. We have elected to treat certain of our active subsidiaries as TRSs. Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates. Our foreign TRSs are subject to foreign income taxes. As of December 31, 2022, one of our TRSs that is subject to income taxes at the applicable corporate rates had a net operating loss (“NOL”) carry-forward of approximately $10.2 million. Also, in connection with the acquisition of one U.K. entity in the first quarter of 2022, we acquired foreign net operating losses of $55.0 million resulting in an NOL deferred tax asset of $13.4 million (see Note 3 – Real Estate Asset Acquisitions and Development and Note 17 – Taxes).  The $10.2 million NOL carry-forward was fully reserved as of December 31, 2022, with a valuation allowance due to uncertainties regarding realization.

Under U.S. current law, NOL carry-forwards generated up through December 31, 2017 may be carried forward for no more than 20 years, and our NOL carry-forwards generated in our taxable years ended after December 31, 2017 may be carried forward indefinitely.

For the year ended December 31, 2022, we recorded approximately $1.2 million of federal, state and local income tax provision and approximately $3.4 million of tax provision for foreign income taxes. These amounts do not include any gross receipts or franchise taxes payable to certain states and municipalities.

Income from Unconsolidated Joint Ventures

The decrease in income from unconsolidated joint ventures was primarily due to one of the joint ventures realizing a $14.9 million gain on sale of real estate investments during 2021.

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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.

The following table presents our Nareit FFO reconciliation for the years ended December 31, 2022, 2021 and 2020:

The $194.7 million decrease in Nareit FFO for the year ended December 31, 2022 compared to 2021 is primarily driven by the overall decrease in total revenue, which is discussed in more detail in the Results of Operations above.

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Liquidity and Capital Resources

Sources and Uses

Our primary sources of cash include rental income and interest payment receipts on our loans, existing availability under our Revolving Credit Facility, proceeds from our DRSPP and the 2021 ATM Program, facility sales, and proceeds from mortgage and other investment payoffs. We anticipate that these sources will be adequate to meet our principal cash flow needs through the next twelve months, which include: funding dividends and distributions to our stockholders and non-controlling interest members, making debt service payments (including principal and interest), funding real estate investments (including facility acquisitions, capital improvement programs and other capital expenditures), funding new and committed loan investments and paying 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 December 31, 2022, we had total assets of $9.4 billion, total equity of $3.8 billion and total debt of $5.3 billion, with such debt representing approximately 58.4% of total capitalization.

Debt

At December 31, 2022, the weighted-average annual interest rate of our debt was 4.1%. Additionally, as of December 31, 2022, 98% of our debt with outstanding principal balances has fixed interest payments. Our high percentage of fixed interest debt has kept our interest expense relatively flat year over year despite rising interest rates. As of December 31, 2022, Omega’s debt obligations consisted of the following:

As of December 31, 2022, we had long-term credit ratings of Baa3 from Moody’s and BBB- from S&P Global and Fitch. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our Revolving Credit Facility accrues interest and fees at a rate per annum equal to LIBOR plus a margin that depends upon our credit rating. A downgrade in credit ratings by Moody’s and S&P Global may have a negative impact on the interest rates and fees for our Revolving Credit Facility.

Our credit facilities that reference LIBOR contain customary LIBOR replacement language, including, but not limited to, the use of rates based on the secured overnight financing rate.

Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of December 31, 2022 and 2021, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

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As of December 31, 2022 we have five forward starting swaps totaling $400 million that are indexed to 3-month LIBOR. 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. The swaps are effective on August 1, 2023 and expire on August 1, 2033 and were issued at a weighted average fixed rate of approximately 0.8675%. The fair value associated with these swaps was $93.0 million as of December 31, 2022.

Equity

At December 31, 2022, we had 234.3 million shares of common stock outstanding and our shares had a market value of $6.5 billion. As of December 31, 2022, we had the following equity programs in place that we can utilize to raise capital:

Dividends

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

Material Cash Requirements

The following table shows our material cash requirements, described below, as of December 31, 2022:

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Capital Expenditures and Funding Commitments

In addition to the obligations in the table above, as of December 31, 2022, we also had $210.9 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. Additionally, we have commitments to fund $71.4 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.

Other Arrangements

We own interests in certain unconsolidated joint ventures as described in Note 11 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 also hold variable interests in certain unconsolidated entities through our loan and other investments. See disclosures regarding our risk of loss associated with these entities with Note 10 to the Consolidated Financial Statements – Variable Interest Entities.

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We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 to the Consolidated Financial Statements – Derivatives and Hedging. We have seen significant increases in fair value of our hedging instruments in 2022, primarily due to macroeconomic factors impacting interest rates and foreign currency rates.

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Cash Flow Summary

The following is a summary of our sources and uses of cash flows for the year ended December 31, 2022 as compared to the year ended December 31, 2021 (dollars in thousands):

For a discussion of our consolidated cash flows for the year ended December 31, 2021 as compared to the year ended December 31, 2020, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Form 10-K.

Cash, cash equivalents and restricted cash totaled $300.6 million as of December 31, 2022, an increase of $276.2 million as compared to the balance at December 31, 2021. The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.

Operating Activities –The decrease in net cash provided by operating activities is primarily driven by a decrease of $144.9 million of net income, net of $155.4 million of non-cash items, primarily due to a year over year reduction in rental income and interest income, as discussed in our material changes analysis under Results of Operations above. The decrease was partially offset by a $48.4 million change in the net movements of the operating assets and liabilities.

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Investing Activities –The change in cash used in investing activities related primarily to (i) a $440.5 million increase in proceeds from the sales of real estate investments driven by an attractive real estate market in which Omega elected to sell non-strategic assets, (ii) a $391.6 million decrease in real estate acquisitions, primarily related to the acquisition of 24 senior living facilities from Healthpeak in the first quarter of 2021, (iii) a $75.7 million decrease in capital improvements to real estate investments and construction in progress (including $68.0 million related to the purchase of a real estate property located in Washington, D.C. in the third quarter of 2021 that Omega, in conjunction with Maplewood, plans to redevelop), (iv) a $68.9 million increase in loan repayments, net of placements which is primarily driven by higher repayments in 2022 and (v) a $10.4 million decrease in investments in unconsolidated joint ventures primarily related to Second Spring II LLC, a new joint venture investment in 2021. Offsetting these changes were: (i) a $14.5 million decrease in distributions from unconsolidated joint ventures in excess of earnings primarily related to the Second Spring Healthcare Investments joint venture due to significant facility sales in the first quarter of 2021 and (ii) a $4.7 million decrease in receipts from insurance proceeds.

Financing Activities –The change in cash used in financing activities was primarily related to (i) a $265.9 million decrease in cash proceeds from the issuance of common stock in 2022 due to decreased issuances under our DRSPP and our 2021 ATM program, as compared to the same period in 2021, (ii) $142.3 million of repurchases of shares of common stock in 2022 as a result of implementing a $500 million repurchase program in January 2022, (iii) a $88.7 million decrease in proceeds from other long-term borrowings, net of repayments and (iv) a $9.6 million increase in redemptions of OP units, partially offset by (i) a $48.6 million decrease in payment of financing related costs due to fees and premiums paid in the first quarter of 2021 related to the early redemption of $350 million of principal of the 4.375% senior notes due 2023, (ii) a $4.8 million decrease in dividends paid primarily resulting from share repurchases throughout 2022 and (iii) a $4.7 million decrease in distributions to Omega OP Unit holders.

Supplemental Guarantor Information

Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at December 31, 2022 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP.

The SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the senior unsecured revolving and term loan credit facility, Omega OP term loan and the outstanding senior notes) and their investments in non-guarantor subsidiaries.

Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As of December 31, 2022, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies were followed in preparing the Consolidated Financial Statements for all periods presented. Actual results could differ from those estimates.

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We have identified the following accounting policies that we believe are critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant assumptions, judgments and estimates. With respect to these critical accounting policies, we believe the application of assumptions, judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:

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Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is based primarily on the consolidated financial statements of Omega Healthcare Investors, Inc. presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in “Forward-Looking Statements” and “Item 1A - Risk Factors” above.

Overview and Outlook

Omega Healthcare Investors, Inc. (“Parent”) is a Maryland corporation that, together with its consolidated subsidiaries 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, Omega OP. As of December 31, 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.

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 skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), and to a lesser extent, independent living facilities (“ILFs”), rehabilitation and acute care facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of our long-term leases and mortgage loans with healthcare operating companies and affiliates (collectively, our “operators”). All of our leases to our operators are “triple-net” leases, which require the operators to pay all property-related expenses. All of our mortgages are secured by first liens on the underlying real estate and personal property of the operators. In addition to our core investments, we selectively make loans to operators for working capital and capital expenditures. These loans, which may be either unsecured or secured by the collateral of the borrower, are classified as other investments. From time to time, we also acquire equity interests in joint ventures or entities that support the long-term healthcare industry and our operators.

Our portfolio of investments at December 31, 2021, included 960 healthcare facilities, located in 42 states and the U.K. that are operated by 63 third-party operators. Our real estate investment in these facilities totaled approximately $10.1 billion at December 31, 2021, with approximately 98% of our real estate investments related to long-term healthcare facilities. The portfolio is made up of (i) 685 SNFs, (ii) 133 ALFs, (iii) 20 ILFs, (iv) 16 specialty facilities, (v) two MOBs, (vi) fixed rate mortgages on 59 SNFs, two ALFs and two specialty facilities and (vii) 41 facilities that are held for sale. At December 31, 2021, we held other investments of approximately $469.9 million, consisting primarily of secured loans to third-party operators of our facilities and $194.7 million of investments in six unconsolidated joint ventures.

As healthcare delivery continues to evolve, we continuously evaluate potential investments, our assets, operators and markets to position our portfolio for long-term success. Our strategy includes applying data analytics to our investment underwriting and asset management, as well as selling or transitioning assets that do not meet our portfolio criteria.

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COVID-19 Pandemic Update

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 million in aggregate of contractual receivables, straight-line receivables and lease inducements to rental income during fiscal year 2020. During the year ended December 31, 2021, Agemo, Gulf Coast Health Care LLC (together with certain affiliates “Gulf Coast”), Guardian Healthcare (”Guardian”) 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. See “Portfolio and Recent Developments – Guardian” below. In addition, on October 14, 2021, Gulf Coast commenced voluntary cases under chapter 11 of the U.S. Bankruptcy Code. See “Receivables, Other Investments and Operator Collectibility – Gulf Coast” below.  As of December 31, 2021, we have placed six operators, inclusive of Gulf Coast, Guardian and 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 six operators was no longer probable.

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 $36.0 million in aggregate of straight-line receivables and lease inducements to rental income for the year ended December 31, 2021 (in connection with the six operators placed on a cash basis during the year). We have also have taken impairments of $83.4 million for the year ended December 31, 2021 in connection with loans outstanding with Agemo, Gulf Coast and Guardian, all of whom are non-paying operators. The six operators that were placed on a cash basis during 2021 collectively represent 6.6% and 7.3%, respectively, of our total revenues (excluding the impact of the write-offs in 2021 and 2020) for the years ended December 31, 2021 and 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, including genetic mutations of the virus into new variants, the commencement in April 2021 for many of our operators of the repayment of accelerated payments of Medicare funds that were previously received as Advanced Medicare payments in 2020 and the commencement in December 2021 of repayment of deferred FICA obligations.

As of January 26, 2022, our operators reported cases of COVID-19 within 713, or 75.5%, of our 944 operating facilities as of September 30, 2021, which includes cases involving employees and residents. This represents a significant increase from the 263 facilities with cases, or 27.7%, of our 949 operating facilities, that our operators reported as of October 27, 2021. Consistent with national trends, we experienced a slight downturn in the number of COVID-19 cases in our facilities from September to November of 2021, followed by a slight increase in December and a meaningful increase in January driven by new variants. The January 2022 case counts are consistent with case rates that were experienced in January 2021, which represented an increase over the December 22, 2020 cases in 614 facilities, or 64% of our 959 operating facilities. We caution that we have not independently validated any such facility virus incidence information, which may be reported on an inconsistent basis by our operators, and we can provide no assurance regarding the information’s accuracy or that there have not been any changes since the time it was obtained from our operators; we also undertake no duty to update this information. It remains uncertain when and to what extent vaccination programs for COVID-19 and any booster doses will mitigate the effects of COVID-19 in our facilities, particularly with regard to new variants of the virus, the impact of governmental vaccine mandates for staff on ongoing staffing shortages in our facilities and other factors that impact virus transmission in our facilities. The impact of these programs will depend in part on the continued efficacy and delivery of the vaccine and booster doses in our facilities, compliance with staff vaccination requirements and participation levels in vaccination programs among the residents and employees of our operators and in the communities in which they operate.

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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 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”), testing mandates, 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 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 2021 that it would be requiring SNF and healthcare workers to be vaccinated against COVID-19 and issued an emergency implementing regulation effective November 5, 2021 requiring covered healthcare facilities to ensure eligible staff have received a first vaccine dose as of December 5, 2021 and a second dose of a two-dose vaccine as of January 4, 2022, with certain permitted exemptions in alignment with federal law, which were subsequently extended by the U.S. Centers for Medicare and Medicaid Services by between one to two months depending on the applicable state. Notwithstanding these extensions, vaccination rates have increased in anticipation of the full implementation of the requirements and we expect them to further increase once such requirements are fully implemented. However, we expect that such mandates may exacerbate ongoing staffing shortages in skilled nursing and senior housing facilities. In addition, operators who do not achieve full compliance with the requirements may face potential survey issues and penalties. At this time, there is significant uncertainty regarding the impact of such developments. 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 generally improved on average during 2021, new variants have caused improvement in occupancy to stall towards the end of 2021 and average occupancy has not returned to pre-pandemic levels. It remains unclear when and the extent to which demand and occupancy levels will return to pre-COVID-19 levels. We believe these challenges to occupancy recovery may be in part due to staffing shortages, which in some cases have required operators to limit admissions, as well as COVID-19 related fatalities at the facilities, the delay of SNF placement and/or utilization of alternative care settings for those with lower level of care needs, the suspension and/or postponement of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.

While substantial government support, primarily through the federal CARES Act in the U.S. and distribution of PPE, vaccines and testing equipment by federal and state governments, was allocated to SNFs and to a lesser extent to ALFs in 2020, federal relief efforts were limited in 2021 as have been relief efforts in certain states. We believe further government support will be needed to continue to offset these impacts. It is unclear whether and to what extent such government support will continue to be sufficient and timely to offset these impacts. In particular, while $25.5 billion in federal funding for healthcare providers impacted by COVID-19 was announced in September 2021 with distributions beginning in late 2021, it remains unclear the extent to which these funds or remaining unallocated funds under the Public Health and Social Services Emergency Fund (“Provider Relief Fund”) will be distributed to our operators in any meaningful way, whether additional funds will be added to the Provider Relief Fund or otherwise allocated to healthcare operators or our operators, or whether additional Medicaid funds under the American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) 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 additional operators may be materially and adversely affected, some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis and we may be unable to restructure such obligations on terms as favorable to us as those currently in place.

There are a number of uncertainties we face as we consider the 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 genetic mutations of the virus into new variants on 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.

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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 in Item 1. Business – Government Regulation and Reimbursement, including any significant limits on the scope of services reimbursed and on reimbursement rates and fees, which could have a material adverse effect on an operator’s results of operations and financial condition, which could adversely affect the operator’s ability to meet its obligations to us.

Other Trends and Conditions

In addition to the impacts of COVID-19 discussed above, our operations have also been and may continue to be impacted by increased competition for the acquisition of facilities in the U.S., which has decreased the number of investment opportunities that would be accretive to our portfolio. As part of our continuous evaluation of our portfolio and in connection with certain operator workout transactions, we expect to continue to opportunistically sell assets, or portfolios of assets, from time to time.

2021 and Recent Highlights

Investments

Dispositions and Impairments

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Financing Activities

Other Highlights

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Collectibility Issues

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Dividends

Results of Operations

The following is our discussion of the consolidated results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020.  For a discussion of our results of operation for the year ended December 31, 2020 as compared to the year ended December 31, 2019, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”).

Revenues

Our revenues for the year ended December 31, 2021 totaled $1.1 billion, an increase of $170.4 million over the same period in 2020.  Following is a description of certain of the changes in revenues for the year ended December 31, 2021 compared to 2020:

Expenses

Our expenses for the year ended December 31, 2021, totaled $777.0 million, an increase of approximately $42.0 million over the same period in 2020. Following is a description of certain of the changes in our expenses for the year ended December 31, 2021 compared to 2020:

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●Our impairment on real estate properties was $44.7 million, compared to $72.5 million for the same period in 2020. The 2021 impairments primarily related to 14 facilities to reduce their net book value to their estimated fair value less costs to sell or fair value. The 2020 impairments primarily related to 25 facilities to reduce their net book value to their estimated fair value less costs to sell or fair value. The 2021 and 2020 impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators.

●Our recovery on direct financing leases was approximately $0.7 million, compared to $3.1 million for the same period in 2020. Our recovery on direct financing leases primarily relates to the Orianna Health Systems bankruptcy and proceeds received from the Trust (See Note 6 – Leases to the Consolidated Financial Statements for further information regarding Orianna Health Systems).

●Our $39.7 million increase in provision for credit losses primarily relates to increase in the amount of specific reserves recorded against loans in 2021 compared to 2020. In 2021, we recorded provisions of $16.7 million (in the third quarter) related to Agemo’s loans, $20.0 million (in the fourth quarter) related to the Gulf Coast DIP facility, and $38.2 million (in the fourth quarter) related to Guardian’s mortgage loan.  In 2020, we recorded provisions of $22.7 million against Agemo’s loans.

Other Income (Expenses)

For the year ended December 31, 2021, total other income was $130.3 million, an increase of approximately $125.4 million over the same period in 2020. The increase was primarily due to a $142.5 million increase in gain on assets sold – net resulting from the sale of 48 facilities and 43 facilities during 2021 and 2020, respectively, as we continue to exit certain facilities, operator relationships and/or states to improve the strength of our overall portfolio, offset by a $30.8 million loss on debt extinguishment primarily resulting from fees, premiums, and expenses related to the redemption of $350 million of the 4.375% Senior Notes due 2023 during the first quarter of 2021.

Income Tax Expense

As a REIT, we generally are not subject to federal income taxes on the REIT taxable income that we distribute to stockholders, subject to certain exceptions. For tax year 2021, we made common dividend payments of $637.6 million to satisfy REIT requirements relating to qualifying income. We have elected to treat certain of our active subsidiaries as TRSs. Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates. Our foreign TRSs are subject to foreign income taxes. As of December 31, 2021, one of our TRSs that is subject to income taxes at the applicable corporate rates had a net operating loss (“NOL”) carry-forward of approximately $10.6 million. The loss carry-forward is fully reserved as of December 31, 2021 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 our NOL carry-forwards generated in our taxable years ended after December 31, 2017 may be carried forward indefinitely. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) modified the NOL carryback rules to permit the use of NOLs arising after December 31, 2017 and before January 1, 2021 to be carried back to recover taxes paid in prior tax periods. We do not anticipate that such changes will materially impact the computation of Omega’s taxable income, or the taxable income of any Omega entity, including our TRSs. We also do not expect that Omega or any Omega entity, including our TRSs, will realize a material tax benefit as a result of the changes to the provisions of the Code made by the CARES Act.

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For the year ended December 31, 2021, we recorded approximately $1.4 million of federal, state and local income tax provision and approximately $2.4 million of tax provision for foreign income taxes. These amounts do not include any gross receipts or franchise taxes payable to certain states and municipalities.

Income from Unconsolidated Joint Ventures

For the year ended December 31, 2021, income from unconsolidated joint ventures was $16.1 million, an increase of approximately $9.9 million over the same period in 2020. The increase was primarily due to one of the joint ventures realizing a $14.9 million gain on sale of real estate investments during 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.

The following table presents our Nareit FFO results for the years ended December 31, 2021 and 2020:

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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 DRSPP and the 2021 ATM Program, facility sales, and proceeds from mortgage and other investment payoffs. We anticipate that these sources will be adequate to fund our cash flow needs through the next twelve months, which include common stock dividends, debt service payments (including principal and interest), real estate investments (including facility acquisitions, capital improvement programs and other capital expenditures), mortgage and other investment loan advances and normal recurring G&A expenses (primarily consisting of employee payroll and benefits and expenses relating to third parties for legal, consulting and audit services).

Capital Structure

At December 31, 2021, we had total assets of $9.6 billion, total equity of $4.1 billion and total net debt of $5.3 billion, with such debt representing approximately 56.4% of total capitalization.

Debt

At December 31, 2021, the weighted-average annual interest rate of our debt was 4.13%. Additionally, as of December 31, 2021, 100% of our debt with outstanding principal balances has fixed interest payments (when considering the impact of cash flow hedges). As of December 31, 2021, Omega’s debt obligations consisted of the following:

As of December 31, 2021, we had long-term credit ratings of Baa3 from Moody’s and BBB- from S&P Global and Fitch. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our Revolving Credit Facility accrues interest and fees at a rate per annum equal to LIBOR plus a margin that depends upon our credit rating. A downgrade in credit ratings by Moody’s and S&P Global may have a negative impact on the interest rates and fees for our Revolving Credit Facility.

Our credit facilities that reference LIBOR contain customary LIBOR replacement language, including, but not limited to, the use of rates based on the secured overnight financing rate.

Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of December 31, 2021 and 2020, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

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Equity

At December 31, 2021, we had 239.1 million shares of common stock outstanding and our shares had a market value of $7.1 billion. As of December 31, 2021, we had the following equity programs in place that we can utilize to raise capital:

Dividends

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

In 2021, we paid dividends of $637.6 million to our common stockholders.

The Board has declared common stock dividends as set forth below:

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Material Cash Requirements

The following table shows our material cash requirements, described below, as of December 31, 2021:

In addition to the obligations in the table above, as of December 31, 2021, we also had $244.7 million of commitments to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments. Additionally, we have commitments to fund $50.1 million of advancements under existing other investment loans. These commitments are expected to be funded over the next several years and are dependent upon the operators’ election to use the commitments.

Other Arrangements

We own interests in certain unconsolidated joint ventures as described in Note 11 to the Consolidated Financial Statements. Our risk of loss is generally limited to our investment in the joint venture and any outstanding loans receivable. We use derivative instruments to hedge interest rate and foreign currency exchange rate exposure as discussed in Note 15 to the Consolidated Financial Statements.

Cash Flow Summary

The following is our discussion of our consolidated cash flows for the year ended December 31, 2021 as compared to the year ended December 31, 2020.  For a discussion of our consolidated cash flows for the year ended December 31, 2020 as compared to the year ended December 31, 2019, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Form 10-K.

Cash, cash equivalents and restricted cash totaled $24.4 million as of December 31, 2021, a decrease of $143.1 million as compared to the balance at December 31, 2020. The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.

Operating Activities – Operating activities generated $722.1 million of net cash flow for the year ended December 31, 2021, as compared to $708.3 million for the same period in 2020, an increase of $13.9 million, which is primarily driven by an increase of $77.8 million of 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. This increase was partially offset by a $63.9 million change in the net movements of the operating assets and liabilities, primarily driven by the change in receivables driven by operator collectibility issues with Agemo, Guardian and Gulf Coast.

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Investing Activities – Net cash flow from investing activities was an outflow of $524.2 million for the year ended December 31, 2021, as compared to an outflow of $89.1 million for the same period in 2020. The $435.1 million change in cash used by investing activities related primarily to (i) a $510.2 million increase in real estate acquisitions, primarily related to the acquisition of 24 senior living facilities from Healthpeak in the first quarter of 2021, (ii) $8.0 million increase in investments in unconsolidated joint ventures primarily related to Second Spring II LLC, a new joint venture investment in 2021, (iii) a $33.8 million increase in capital improvements to real estate investments and construction in progress (including $68.0 million related to the purchase of a real estate property located in Washington, D.C. that Omega, in conjunction with Maplewood, plans to redevelop), (iv) a $35.6 million increase in other investments, net of repayments driven by lower repayments in 2021 and (v) a $14.7 million decrease in proceeds from sale of direct financing lease assets and related trust related to Orianna. Offsetting these changes were: (i) a $11.1 million decrease in mortgage placements, net of repayments which is primarily driven by higher repayments in 2021, (ii) $137.7 million increase in proceeds from the sales of real estate investments driven by an attractive real estate market in which Omega elected to sell non-strategic assets, (iii) a $5.1 million decrease in business acquisitions and (iv) a $5.1 million increase in receipts from insurance proceeds.

Financing Activities – Net cash flow from financing activities was an outflow of $341.1 million for the year ended December 31, 2021, as compared to an outflow of $485.5 million for the same period in 2020. The $144.4 million change in cash used in financing activities was primarily related to (i) a $82.8 million change in other long-term borrowings – net which is the result of greater additional long-term borrowings in 2021 (including the issuance of $700 million 3.25% Senior Notes due in 2033) as compared to 2020, partially offset by other long-term debt repayments in 2021 (including pay downs of $350 million on the 4.375% Senior Notes due in 2023, $138.4 million related to the Sterling term loan and $102.5 million on the 2017 Revolving Credit Facility), and (ii) a $122.2 million increase in cash proceeds from the issuance of common stock in 2021, as compared to the same period in 2020 primarily driven by $126.7 million of proceeds from the DRSPP in 2021, offset by (a) a $25.3 million increase in dividends paid primarily resulting from additional share issuances throughout 2020 and 2021 and (b) a $30.8 million increase in payment of financing related costs related to the redemption of $350 million of the 4.375% Senior Notes due 2023 and entering new debt facilities in 2021 such as the Revolving Credit Facility, the OP Term Loan and the 3.25% Senior Notes due 2033.

Supplemental Guarantor Information

Parent has issued approximately $4.9 billion aggregate principal of senior notes outstanding at December 31, 2021 that were registered under the Securities Act of 1933, as amended. The senior notes are guaranteed by Omega OP.

The SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities, such as our senior notes. As a result of these amendments, registrants are permitted to provide certain alternative financial and non-financial disclosures, to the extent material, in lieu of separate financial statements for subsidiary issuers and guarantors of registered debt securities. Accordingly, separate consolidated financial statements of Omega OP have not been presented. Parent and Omega OP, on a combined basis, have no material assets, liabilities or operations other than financing activities (including borrowings under the senior unsecured revolving and term loan credit facility, Omega OP term loan and the outstanding senior notes) and their investments in non-guarantor subsidiaries.

Omega OP is currently the sole guarantor of our senior notes. The guarantees by Omega OP of our senior notes are full and unconditional and joint and several with respect to the payment of the principal and premium and interest on our senior notes. The guarantees of Omega OP are senior unsecured obligations of Omega OP that rank equal with all existing and future senior debt of Omega OP and are senior to all subordinated debt. However, the guarantees are effectively subordinated to any secured debt of Omega OP. As of December 31, 2021, there were no significant restrictions on the ability of Omega OP to make distributions to Omega.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements. These policies were followed in preparing the Consolidated Financial Statements for all periods presented. Actual results could differ from those estimates.

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We have identified the following significant accounting policies that we believe are critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant assumptions, judgments and estimates. With respect to these critical accounting policies, we believe the application of assumptions, judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:

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