NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
June 30, 2018
NOTE 1 – BASIS OF PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES
Business Overview and Organization
Omega Healthcare Investors,
Inc. (“Omega”) was formed as a real estate investment trust (“REIT”) and incorporated in the State of Maryland
on March 31, 1992. Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of Omega's assets
are owned directly or indirectly by, and all of Omega's operations are conducted directly or indirectly through, its operating
partnership subsidiary, OHI Healthcare Properties Limited Partnership (“Omega OP”). Omega OP was formed as a limited
partnership and organized in the State of Delaware on October 24, 2014. Unless stated otherwise or the context otherwise requires,
the terms the “Company,” “we,” “our” and “us” means Omega and Omega OP, collectively.
The Company has one
reportable segment consisting of investments in healthcare-related real estate properties located in the United States (“U.S.”)
and the United Kingdom (“U.K.”). Our core business is to provide financing and capital to the long-term healthcare
industry with a particular focus on skilled nursing facilities (“SNFs”) and, to a lesser extent, assisted living facilities
(“ALFs”), independent living facilities and rehabilitation and acute care facilities. Our core portfolio consists of
long-term leases and mortgage agreements. All of our leases are “triple-net” leases, which require the tenants to pay
all property-related expenses. Our mortgage revenue derives from fixed rate mortgage loans, which are secured by first mortgage
liens on the underlying real estate and personal property of the mortgagor. Our other investment income derives from fixed and
variable rate loans, which are either unsecured or secured by the collateral of the borrower.
Omega OP is governed
by the Second Amended and Restated Agreement of Limited Partnership of OHI Healthcare Properties Limited Partnership, dated as
of April 1, 2015 (the “Partnership Agreement”). Omega has exclusive control over Omega OP’s day-to-day management
pursuant to the Partnership Agreement. As of June 30, 2018, Omega owned approximately 96% of the issued and outstanding units of
partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 4% of the outstanding Omega
OP Units.
Basis of Presentation
The accompanying unaudited
consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”) regarding interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles
(“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of operations for the interim periods reported herein
are not necessarily indicative of results to be expected for the full year. These unaudited consolidated financial statements should
be read in conjunction with the financial statements and the footnotes thereto included in our latest Annual Report on Form 10-K
filed with the SEC on February 23, 2018.
Omega’s
consolidated financial statements include the accounts of (i) Omega, (ii) Omega OP, and (iii) all direct and indirect wholly owned
subsidiaries of Omega. All intercompany transactions and balances have been eliminated in consolidation
,
and
Omega’s net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
Omega OP’s consolidated
financial statements include the accounts of (i) Omega OP, and (ii) all direct and indirect wholly owned subsidiaries of Omega
OP. All intercompany transactions and balances have been eliminated in consolidation.
Variable Interest Entities
GAAP requires us to
identify entities for which control is achieved through means other than voting rights and to determine which business enterprise
is the primary beneficiary of variable interest entities (“VIEs”). A VIE is broadly defined as an entity with one or
more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s
activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk
lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the
obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the
entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially
all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few
voting rights. We may change our original assessment of a VIE upon subsequent events such as the modification of contractual arrangements
that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion
of an interest held by the primary beneficiary.
Our variable interests
in VIEs may be in the form of equity ownership, leases, guarantees and/or loans with our operators. We analyze our agreements and
investments to determine whether our operators or unconsolidated joint venture are VIEs and, if so, whether we are the primary
beneficiary.
We consolidate a VIE
when we determine that we are its primary beneficiary. We identify the primary beneficiary of a VIE as the enterprise that has
both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance;
and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity.
Factors considered in determining whether we are the primary beneficiary of an entity include: (i) our voting rights, if any; (ii)
our involvement in day-to-day capital and operating decisions; (iii) our risk and reward sharing; (iv) the financial condition
of the operator or joint venture and (iv) our representation on the VIE’s board of directors. We perform this analysis on
an ongoing basis.
As of June 30, 2018,
we have not consolidated any VIEs, as we do not have the power to direct the activities of any VIEs that most significantly impact
their economic performance and we do not have the obligation to absorb losses or receive benefits of the VIEs that could be significant
to the entity.
Cash and Cash Equivalents
Cash and cash equivalents
consist of cash on hand and highly liquid investments with a maturity date of three months or less when purchased. These investments
are stated at cost, which approximates fair value. The majority of our cash, cash equivalents and restricted cash are held at major
commercial banks. Certain cash account balances exceed FDIC insurance limits of $250,000 per account and, as a result, there is
a concentration of credit risk related to amounts in excess of the insurance limits. We regularly monitor the financial stability
of these financial institutions and believe that we are not exposed to any significant credit risk in cash, cash equivalents or
restricted cash.
Restricted Cash
Restricted cash consists
primarily of liquidity deposits escrowed for tenant obligations required by us pursuant to certain contractual terms. Prior to
June 1, 2018, restricted cash also included other deposits required by the U.S. Department of Housing and Urban Development (“HUD”)
in connection with our mortgage borrowings guaranteed by HUD. For additional information see Note 2 – Properties and Investments
and Note 14 – Borrowing Activities and Arrangements.
Real Estate Investment Impairment
Management evaluates
our real estate investments for impairment indicators at each reporting period, including the evaluation of our assets’ useful
lives. The judgment regarding the existence of impairment indicators is based on factors such as, but not limited to, market conditions,
operator performance including the current payment status of contractual obligations and expectations of the ability to meet future
contractual obligations, legal structure, as well as our intent with respect to holding or disposing of the asset. If indicators
of impairment are present, management evaluates the carrying value of the related real estate investments in relation to management’s
estimate of future undiscounted cash flows of the underlying facilities. The estimated future undiscounted cash flows are generally
based on the related lease which relates to one or more properties and may include cash flows from the eventual disposition of
the asset. In some instances, there may be various potential outcomes for a real estate investment and its potential future cash
flows. In these instances, the undiscounted future cash flows used to assess the recoverability are probability-weighted based
on management’s best estimates as of the date of evaluation. Provisions for impairment losses related to long-lived assets
are recognized when expected future undiscounted cash flows based on our intended use of the property are determined to be less
than the carrying values of the assets. An adjustment is made to the net carrying value of the real estate investments for the
excess of carrying value over fair value. The fair value of the real estate investment is determined based on current market conditions
and considers matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties,
and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. Additionally, our evaluation
of fair value may consider valuing the property as a nursing home as well as alternative uses. All impairments are taken as a period
cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset. Management’s
impairment evaluation process, and when applicable, impairment calculations involve estimation of the future cash flows from management’s
intended use of the property as well as the fair value of the property. Changes in the facts and circumstances that drive management’s
assumptions may result in an impairment of the Company’s assets in a future period that could be material to the Company’s
results of operations.
For the three months ended June 30, 2018 and 2017, we recognized (a recovery on) impairment on real estate
properties of $(1.1) million and $10.1 million, respectively. For the six months ended June 30, 2018 and 2017, we recognized impairment
on real estate properties of $3.8 million and $17.8 million, respectively. For additional information see Note 2 – Properties
and Investments.
Allowance for Losses on Mortgages, Other
Investments and Direct Financing Leases
The allowances for
losses on mortgage notes receivable, other investments and direct financing leases (collectively, our “loans”) are
maintained at a level believed adequate to absorb potential losses. The determination of the allowances is based on a quarterly
evaluation of these loans, including general economic conditions and estimated collectability of loan payments. We evaluate the
collectability of our loans based on a combination of factors, including, but not limited to, delinquency status, financial strength
of the borrower and guarantors, if applicable, and the value of the underlying collateral. If such factors indicate that there
is greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired
when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according
to the contractual terms of the loan agreements. Consistent with this definition, all loans on non-accrual status may be deemed
impaired. To the extent circumstances improve and the risk of collectability is diminished, we will return these loans to full
accrual status. When management identifies potential loan impairment indicators, the loan is written down to the present value
of the expected future cash flows. In cases where expected future cash flows are not readily determinable, the loan is written
down to the fair value of the underlying collateral, if applicable. We may base our valuation on a loan’s observable market
price, if any, or the fair value of collateral, net of sales costs, if the repayment of the loan is expected to be provided solely
by the sale of the collateral.
We account for impaired
loans using (a) the cost-recovery method, and/or (b) the cash basis method. We generally utilize the cost-recovery method for impaired
loans for which impairment reserves were recorded. We utilize the cash basis method for impaired loans for which no impairment
reserves were recorded because the net present value of the discounted cash flows expected under the loan and/or the underlying
collateral supporting the loan were equal to or exceeded the book value of the loan. Under the cost-recovery method, we apply cash
received against the outstanding loan balance prior to recording interest income. Under the cash basis method, we apply cash received
to principal or interest income based on the terms of the agreement. As of June 30, 2018 and December 31, 2017, we had $177.1 million
and $177.5 million, respectively, of reserves on our loans. For additional information see Note 3 – Direct Financing Leases,
Note 4 – Mortgage Notes Receivable and Note 5 – Other Investments.
Goodwill Impairment
We assess goodwill
for potential impairment during the fourth quarter of each fiscal year, or during the year if an event or other circumstance indicates
that we may not be able to recover the carrying amount of the net assets of the reporting unit. In evaluating goodwill for impairment
on an interim basis, we assess qualitative factors
such as a
significant
decline in real estate valuations,
current macroeconomic conditions, state
of the equity and capital markets and our overall financial and operating performance
or a significant decline in the value
of our market capitalization, to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that
the fair value of the reporting unit is less than its carrying amount. On an annual basis during the fourth quarter of each
fiscal year, or on an interim basis if we conclude it is more likely than not that the fair value of the reporting unit is less
than its carrying value, we perform a two-step goodwill impairment test to identify potential impairment and measure the amount
of impairment we will recognize, if any.
Noncontrolling Interests
Noncontrolling interests
is the portion of equity not attributable to the respective reporting entity. We present the portion of any equity that we do not
own in consolidated entities as noncontrolling interests and classify those interests as a component of total equity, separate
from total stockholders’ equity, or owners’ equity on our Consolidated Balance Sheets. We include net income attributable
to the noncontrolling interests in net income in our Consolidated Statements of Operations.
As our ownership of
a controlled subsidiary increases or decreases, any difference between the aggregate consideration paid to acquire the noncontrolling
interests and our noncontrolling interest balance is recorded as a component of equity in additional paid-in capital, so long as
we maintain a controlling ownership interest.
The noncontrolling
interest for Omega represents the outstanding Omega OP Units held by outside investors.
Foreign Operations
The U.S. dollar is
the functional currency for our consolidated subsidiaries operating in the U.S. The functional currency for our consolidated subsidiaries
operating in the U.K. is the British Pound (“GBP”). For our consolidated subsidiaries whose functional currency is
not the U.S. dollar (“USD”), we translate their financial statements into the USD. We translate assets and liabilities
at the exchange rate in effect as of the financial statement date. Revenue and expense accounts are translated using an average
exchange rate for the period. Gains and losses resulting from translation are included in Omega OP’s owners’ equity
and Omega’s accumulated other comprehensive loss (“AOCL”), as a separate component of equity and a proportionate
amount of gain or loss is allocated to noncontrolling interests.
We and certain of our
consolidated subsidiaries may have intercompany and third-party debt that is not denominated in the entity’s functional currency.
When the debt is remeasured against the functional currency of the entity, a gain or loss can result. The resulting adjustment
is reflected in results of operations, unless it is intercompany debt that is deemed to be long-term in nature in which case the
adjustments are included in Omega OP’s owners’ equity and Omega’s AOCL and a proportionate amount of gain or
loss is allocated to noncontrolling interests.
Derivative Instruments
Cash flow hedges
During our normal course
of business, we may use certain types of derivative instruments for the purpose of managing interest rate and currency risk. To
qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure
that they are designed to hedge. In addition, at the inception of a qualifying cash flow hedging relationship, the underlying transaction
or transactions, must be, and are expected to remain, probable of occurring in accordance with the Company’s related assertions.
The Company recognizes all derivative instruments, including embedded derivatives required to be bifurcated, as assets or liabilities
in the Consolidated Balance Sheets at their fair value which is determined using a market approach and Level 2 inputs. Changes
in the fair value of derivative instruments that are not designated in hedging relationships or that do not meet the criteria of
hedge accounting are recognized in earnings. For derivatives designated in qualifying cash flow hedging relationships, the gain
or loss on the derivative is recognized in Omega OP’s owners’ equity and Omega’s AOCL as a separate component
of equity and a proportionate amount of gain or loss is allocated to noncontrolling interest. We formally document all relationships
between hedging instruments and hedged items, as well as our risk-management objectives and strategy for undertaking various hedge
transactions. This process includes designating all derivatives that are part of a hedging relationship to specific forecasted
transactions as well as recognized liabilities or assets on the Consolidated Balance Sheets. We also assess and document, both
at inception of the hedging relationship and on a quarterly basis thereafter, whether the derivatives are highly effective in offsetting
the designated risks associated with the respective hedged items. If it is determined that a derivative ceases to be highly effective
as a hedge, or that it is probable the underlying forecasted transaction will not occur, we discontinue hedge accounting prospectively
and record the appropriate adjustment to earnings based on the current fair value of the derivative. As a matter of policy, we
do not use derivatives for trading or speculative purposes. At June 30, 2018 and December 31, 2017, $7.7 million and $1.5 million,
respectively, of qualifying cash flow hedges were recorded at fair value in other assets on our Consolidated Balance Sheets.
Net investment hedge
The Company is exposed
to fluctuations in the GBP against its functional currency, the USD, relating to its investments in healthcare-related real estate
properties located in the U.K. The Company uses a nonderivative, GBP-denominated term loan to manage its exposure to fluctuations
in the GBP-USD exchange rate. The foreign currency transaction gain or loss on the nonderivative hedging instrument that is designated
and qualifies as a net investment hedge is reported in Omega OP’s owners’ equity and Omega’s AOCL in our Consolidated
Balance Sheets.
Accounts Receivable
Accounts receivable
includes: contractual receivables, effective yield interest receivables, straight-line rent receivables and lease inducements,
net of an estimated provision for losses related to uncollectible and disputed accounts. Contractual receivables relate to the
amounts currently owed to us under the terms of our lease and loan agreements. Effective yield interest receivables relate to the
difference between the interest income recognized on an effective yield basis over the term of the loan agreement and the interest
currently due to us according to the contractual agreement. Straight-line rent receivables relate to the difference between the
rental revenue recognized on a straight-line basis and the amounts currently due to us according to the contractual agreement.
Lease inducements result from value provided by us to the lessee, at the inception, modification, or renewal of the lease, and
are amortized as a reduction of rental revenue over the non-cancellable lease term.
On a quarterly basis,
and more frequently as appropriate, we review our accounts receivable to determine their collectability. The determination of collectability
of these assets requires significant judgment and is affected by several factors relating to the credit quality of our operators
that we regularly monitor, including (i) payment history, (ii) the age of the contractual receivables, (iii) the current economic
conditions and reimbursement environment, (iv) the ability of the tenant to perform under the terms of their lease and/or contractual
loan agreements and (v) the value of the underlying collateral of the agreement, if any. If we determine collectability of any
of our contractual receivables is at risk, we estimate the potential uncollectible amounts and provide an allowance. In the case
of a lease recognized on a straight-line basis, a loan recognized on an effective yield basis or the existence of lease inducements,
we generally provide an allowance for straight-line, effective interest, and/or lease inducement accounts receivable when certain
conditions or indicators of adverse collectability are present. If the accounts receivable balance is subsequently deemed uncollectible,
the receivable and allowance for doubtful account balance are written off.
A summary of our net
receivables by type is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Contractual receivables
|
|
$
|
37,655
|
|
|
$
|
43,258
|
|
Effective yield interest receivables
|
|
|
12,384
|
|
|
|
11,673
|
|
Straight-line rent receivables
|
|
|
226,633
|
|
|
|
216,054
|
|
Lease inducements
|
|
|
48,456
|
|
|
|
16,812
|
|
Allowance
|
|
|
(4,988
|
)
|
|
|
(8,463
|
)
|
Accounts receivable – net
|
|
$
|
320,140
|
|
|
$
|
279,334
|
|
During the first quarter
of 2018, we wrote-off approximately $7.8 million of straight-line rent receivables to provision for uncollectible accounts, as
a result of facility transitions to other operators.
During the second quarter
of 2018, we placed two of our operators on a cash basis and wrote-off approximately $2.8 million of straight-line rent receivables
and reserved approximately $0.6 million of contractual receivables to provision for uncollectible accounts related to these two
operators. The provision for uncollectible accounts was offset by a recovery of approximately $2.8 million.
During the first quarter
of 2018, we paid an existing operator approximately $50 million in exchange for a reduction of such operator’s participation
in an in-the-money purchase option. As a result, we recorded an approximate $28 million lease inducement that will be amortized
as a reduction to rental income over the remaining term of the lease. The remaining $22 million was recorded as a reduction to
the initial contingent liability which was included in accrued expenses and other liabilities on our Consolidated Balance Sheets.
Reclassification
Certain prior quarter
amounts have been reclassified to conform to the current quarter presentation.
Accounting Pronouncements Adopted in
2018
In 2014, the Financial
Accounting Standards Board (“FASB”) issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”),
which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09
states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While
ASU 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real
estate or equipment. In addition, the FASB issued targeted updates to clarify specific implementation issues of ASU 2014-09. These
updates included ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
ASU 2016-10,
Identifying
Performance Obligations and Licensing,
and ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients.
As
a result of adopting ASU 2014-09 and its updates on January 1, 2018, the Company recognized $10.0 million of deferred gain resulting
from the sale of facilities to a third-party in December 2017 through opening equity on January 1, 2018. The Company adopted ASU
2014-09 and its subsequent updates in accordance with the modified retrospective approach. The adoption of ASU 2014-09 and its
related updates did not have a material impact on our consolidated financial statements, as a substantial portion of our revenue
consists of rental income from leasing arrangements and interest income from loan arrangements, both of which are specifically
excluded from ASU 2014-09 and its updates.
In August 2017, the
FASB issued ASU 2017-12,
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
(“ASU
2017-12”). The purpose of this updated guidance is to better align the financial reporting for hedging activities with the
economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard
using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires
adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative
effect of initially applying ASU 2017-12 as an adjustment to accumulated other comprehensive income (loss) with a corresponding
adjustment to the opening balance of equity as of the beginning of the fiscal year that an entity adopts the update. On January
1, 2018, the Company adopted ASU 2017-12 using the modified retrospective transition method. As a result of adopting the standard,
the Company is making certain adjustments to its existing hedge designation documentation for active hedging relationships in order
to take advantage of specific provisions in the new guidance and to fully align its documentation with ASU 2017-12. The adoption
of ASU 2017-12 did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Pending
Adoption
In February 2016, the
FASB issued ASU 2016-02,
Leases
(“ASU 2016-02”), which amends the existing accounting standards for lease accounting,
including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting.
ASU 2016-02 will be effective for the Company beginning January 1, 2019. Early adoption of ASU 2016-02 as of its issuance is permitted.
The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date
of initial application, with an option to use certain transition relief. As a result of the pending adoption of ASU 2016-02, the
Company may be required to record real estate tax revenues and an equal and offsetting real estate tax expense, as a result of
our operators paying real estate taxes on our behalf. In July 2018, the FASB issued ASU 2018-11,
Leases
(“ASU 2018-11”)
:
Targeted Improvements
to simplify the implementation of ASU 2016-02. This targeted improvement permits the adoption of ASU
2016-02 at the adoption date instead of the earliest comparative period presented in the financial statements and a practical expedient
permitting lessors to not separate nonlease components from the associated lease component if certain conditions are met. Upon
adoption of ASU 2016-02 and its updates, we intend to transition to the new leasing accounting standard on January 1, 2019, without
modifying our prior year balance sheet and recognizing the cumulative-effect adjustment to opening equity. We continue to evaluate
the other impacts of adopting ASU 2016-02 and its updates on our consolidated financial statements.
In June 2016, the FASB
issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326
) (“ASU 2016-13”), which changes the
impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result
in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December
15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We are currently evaluating
the impact of adopting ASU 2016-13 on our consolidated financial statements.
NOTE 2 – PROPERTIES AND INVESTMENTS
Leased Property
Our leased real estate
properties, represented by 709 SNFs, 116 ALFs, 14 specialty facilities and one medical office building at June 30, 2018, are leased
under provisions of single or master operating leases with initial terms typically ranging from five to 15 years, plus renewal
options. Also see Note 3 – Direct Financing Leases for information regarding additional properties accounted for as direct
financing leases. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior
year and are generally computed in one of three methods depending on specific provisions of each lease as follows: (i) a specific
annual percentage increase over the prior year’s rent, generally between 2.0% and 3.0%; (ii) an increase based on the change
in pre-determined formulas from year to year (e.g., increases in the Consumer Price Index (“CPI”)); or (iii) specific
dollar increases over prior years. Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes
and insurance on the leased properties.
A summary of our investment
in leased real estate properties is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Buildings
|
|
$
|
5,985,795
|
|
|
$
|
6,098,119
|
|
Land
|
|
|
782,913
|
|
|
|
795,874
|
|
Furniture, fixtures and equipment
|
|
|
436,680
|
|
|
|
440,737
|
|
Site improvements
|
|
|
230,304
|
|
|
|
227,150
|
|
Construction in progress
|
|
|
135,969
|
|
|
|
94,080
|
|
Total real estate investments
|
|
|
7,571,661
|
|
|
|
7,655,960
|
|
Less accumulated depreciation
|
|
|
(1,475,463
|
)
|
|
|
(1,376,828
|
)
|
Real estate investments - net
|
|
$
|
6,096,198
|
|
|
$
|
6,279,132
|
|
The following table
summarizes the significant acquisitions that occurred during the first six months of 2018:
|
|
Number of
|
|
|
|
|
Total
|
|
|
|
|
|
Building & Site
|
|
|
Furniture
|
|
|
Initial
|
|
|
|
Facilities
|
|
|
Country/
|
|
Investment
|
|
|
Land
|
|
|
Improvements
|
|
|
& Fixtures
|
|
|
Annual
|
|
Period
|
|
SNF
|
|
|
ALF
|
|
|
State
|
|
(in millions)
|
|
|
Cash Yield
(3)
|
|
Q1
|
|
|
-
|
|
|
|
1
|
|
|
UK
|
|
$
|
4.0
|
(1)
|
|
$
|
0.9
|
|
|
$
|
2.9
|
|
|
$
|
0.2
|
|
|
|
8.5
|
%
|
Q1
|
|
|
-
|
|
|
|
1
|
|
|
UK
|
|
|
5.7
|
(2)
|
|
|
1.4
|
|
|
|
4.1
|
|
|
|
0.2
|
|
|
|
8.5
|
%
|
Q1
|
|
|
1
|
|
|
|
-
|
|
|
PA
|
|
|
7.4
|
|
|
|
1.6
|
|
|
|
5.4
|
|
|
|
0.4
|
|
|
|
9.5
|
%
|
Q1
|
|
|
1
|
|
|
|
-
|
|
|
VA
|
|
|
13.2
|
|
|
|
2.4
|
|
|
|
10.5
|
|
|
|
0.3
|
|
|
|
9.5
|
%
|
Q2
|
|
|
5
|
|
|
|
-
|
|
|
TX
|
|
|
22.8
|
|
|
|
0.5
|
|
|
|
20.4
|
|
|
|
1.9
|
|
|
|
9.5
|
%
|
Total
|
|
|
7
|
|
|
|
2
|
|
|
|
|
$
|
53.1
|
|
|
$
|
6.8
|
|
|
$
|
43.3
|
|
|
$
|
3.0
|
|
|
|
|
|
|
(1)
|
Omega recorded a non-cash deferred tax liability of approximately
$0.4 million in connection with this acquisition.
|
|
(2)
|
Omega recorded a non-cash deferred tax liability of approximately
$0.2 million in connection with this acquisition.
|
|
(3)
|
The cash yield is based on the purchase price.
|
For the six months
ended June 30, 2018, we acquired two parcels of land (not reflected in the table above) for approximately $3.5 million with the
intent of building new facilities for our existing operators.
Asset Sales, Impairments and Other
During the first quarter
of 2018, we sold 14 facilities (five of which were previously held for sale at December 31, 2017) subject to operating leases for
approximately $74.7 million in net cash proceeds recognizing a gain on sale of approximately $17.5 million. In addition, we recorded
impairments on real estate properties of approximately $4.9 million on 17 facilities (16 of which were subsequently reclassified
to assets held for sale).
During the second quarter
of 2018, we sold 45 facilities and one ancillary building (33 of which were previously held for sale at March 31, 2018) subject
to operating leases for approximately $147.2 million in net cash proceeds recognizing a loss on sale of approximately $2.9 million.
In addition, we recorded impairments of approximately $4.1 million on nine facilities (three of which were subsequently reclassified
to assets held for sale). Our impairments were offset by $5.2 million of insurance proceeds received related to a facility destroyed
in November 2017.
Of the 45 facilities
sold during the second quarter of 2018, we sold 12 SNFs on June 1, 2018 (12 of which were previously held for sale at March 31,
2018) secured by HUD mortgages to subsidiaries of an existing operator. The Company sold the 12 SNF facilities with carrying values
of approximately $62 million for approximately $78 million which consisted of $25 million of cash consideration and their assumption
of approximately $53 million of our HUD mortgages. See Note 14 – Borrowing Activities and Arrangements for additional details.
Simultaneously, subsidiaries of the operator assumed our HUD restricted cash accounts, deposits and escrows. The Company recorded
a gain on sale of approximately $11 million after approximately $5 million of closing and other transaction related costs. In connection
with this sale, we provided a principal of an existing operator an unsecured loan of approximately $39.7 million. See Note 5 –
Other Investments for details.
Our recorded impairments
were primarily the result of decisions to exit certain non-strategic facilities and/or operators. We reduced the net book value
of the impaired facilities to their estimated fair values or, with respect to the facilities reclassified to assets held for sale,
to their estimated fair values less costs to sell. To estimate the fair value of the facilities, we utilized a market approach
which considered binding sale agreements (a Level 1 input) and/or Level 3 inputs (which generally consist of non-binding offers
from unrelated third parties). Also see Note 8 – Assets Held For Sale.
NOTE 3 – DIRECT FINANCING LEASES
The components of investments
in direct financing leases consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Minimum lease payments receivable
|
|
$
|
3,649,602
|
|
|
$
|
3,707,079
|
|
Less unearned income
|
|
|
(3,127,950
|
)
|
|
|
(3,169,942
|
)
|
Investment in direct financing leases
|
|
|
521,652
|
|
|
|
537,137
|
|
Less allowance for loss on direct financing lease
|
|
|
(172,187
|
)
|
|
|
(172,172
|
)
|
Investment in direct financing leases – net
|
|
$
|
349,465
|
|
|
$
|
364,965
|
|
|
|
|
|
|
|
|
|
|
Properties subject to direct financing leases
|
|
|
40
|
|
|
|
41
|
|
Number of direct financing leases
|
|
|
4
|
|
|
|
5
|
|
The following minimum
rents are due under our direct financing leases for the remainder of 2018 and the subsequent five years (in thousands):
2018
(1)
|
|
|
2019
(1)
|
|
|
2020
(1)
|
|
|
2021
(1)
|
|
|
2022
(1)
|
|
|
2023
(1)
|
|
$
|
580
|
|
|
$
|
1,166
|
|
|
$
|
1,170
|
|
|
$
|
1,084
|
|
|
$
|
1,106
|
|
|
$
|
1,128
|
|
|
(1)
|
Orianna has been excluded from the contractual minimum
rent payments due under our direct financing leases as the facilities are expected to be transitioned or sold. See below for additional
information.
|
In June 2018, we sold
one SNF with a carrying value of approximately $15.4 million subject to a direct financing lease to an unrelated third-party for
approximately $15.4 million.
On November 27, 2013,
we closed an aggregate $529 million purchase/leaseback transaction in connection with the acquisition of Ark Holding Company, Inc.
(“Ark Holding”) by 4 West Holdings Inc. At closing, we acquired 55 SNFs and 1 ALF operated by Ark Holding and leased
the facilities back to Ark Holding, now known as New Ark Investment Inc. (“New Ark” which does business as “Orianna
Health Systems” and is herein referred to as “Orianna”), pursuant to four 50-year master leases with rental payments
yielding 10.6% per annum over the term of the leases. The purchase/leaseback transaction is being accounted for as a direct financing
lease.
The 38 facilities remaining
under our master leases with Orianna as of June 30, 2018 are located in seven states, predominantly in the southeastern U.S. (37
facilities) and Indiana (1 facility). Our recorded investment in these direct financing leases, net of the $172.2 million allowance,
amounted to $337.7 million as of June 30, 2018. We have not recognized any direct financing lease income from Orianna for the period
from July 1, 2017 through June 30, 2018.
Orianna has not satisfied
the contractual payments due under the terms of the remaining two direct financing leases or the separate operating lease covering
four facilities with the Company and the collectability of future amounts due is uncertain.
In March 2018, Orianna
commenced voluntary Chapter 11 proceedings in the United States Bankruptcy Court for the Northern District of Texas,
Dallas Division (the “Bankruptcy Court”). As described in Orianna’s filings with the Bankruptcy Court, we entered
into a Restructuring Support Agreement (“RSA”) that was expected to form the basis for Orianna’s restructuring.
The RSA provided for the recommencement, in April 2018, of partial rent payments at $1.0 million per month and established
a specific timeline for the implementation of Orianna’s planned restructuring. The RSA provided for the transition of 23
facilities to new operators and the potential sale of the remaining 19 facilities subject to the plan of reorganization as approved
by the Bankruptcy Court. On July 25, 2018, we terminated the RSA with Orianna. See Note 19 – Subsequent Events.
To provide liquidity
to Orianna during their Chapter 11 proceedings, we entered into a senior secured superpriority debtor-in-possession (“DIP”)
credit agreement with Orianna for a revolving credit and term loan DIP facility of up to $30 million, which DIP facility was
approved by the Bankruptcy Court on an interim basis on March 9, 2018 and on a final basis on May 14, 2018. On July 23, 2018, we
notified Orianna that it was in default under the DIP facility. See Note 5 – Other Investments and Note 19 – Subsequent
Events.
In 2017, we recorded
an allowance for loss on direct financing leases of $172.2 million with Orianna covering 38 facilities in the Southeast region
of the U.S. The amount of the allowance was determined based on the fair value of the facilities subject to the direct financing
lease. To estimate the fair value of the underlying collateral, we utilized an income approach and Level 3 inputs. Our estimate
of fair value assumed annual rents ranging between $32.0 million and $38.0 million, rental yields between 9% and 10%, current and
projected operating performance of the facilities, coverage ratios and bed values. Such assumptions are subject to change based
on changes in market conditions and the ultimate resolution of this matter. Such changes could be significantly different than
the currently estimated fair value and such differences could have a material impact on our financial statements.
In addition to our
direct financing leases with Orianna, we own four facilities and lease them to Orianna under a master lease which expires in 2026.
The four facility lease is being accounted for as an operating lease. We have not recognized any income on this operating lease
for the period from July 1, 2017 through June 30, 2018, as Orianna did not pay the contractual amounts due and collectability is
uncertain. Our recorded investment in the four facilities subject to this operating lease was $37.3 million as of June 30, 2018.
NOTE 4 – MORTGAGE NOTES RECEIVABLE
As of June 30, 2018,
mortgage notes receivable relate to six fixed rate mortgage notes on 53 long-term care facilities. The mortgage notes are secured
by first mortgage liens on the borrowers' underlying real estate and personal property. The mortgage notes receivable relate to
facilities located in six states that are operated by five independent healthcare operating companies. We monitor compliance with
mortgages and when necessary have initiated collection, foreclosure and other proceedings with respect to certain outstanding mortgage
notes.
Mortgage interest income
is recognized as earned over the terms of the related mortgage notes, typically using the effective yield method. Allowances are
provided against earned revenues from mortgage interest when collection of amounts due becomes questionable or when negotiations
for restructurings of troubled operators lead to lower expectations regarding ultimate collection. When collection is uncertain,
mortgage interest income on impaired mortgage loans is recognized as received after taking into account the application of security
deposits.
The principal amounts
outstanding of mortgage notes receivable, net of allowances, were as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Mortgage note due 2027; interest at 10.18%
|
|
$
|
112,500
|
|
|
$
|
112,500
|
|
Mortgage notes due 2029; interest at 9.67%
(1)
|
|
|
529,960
|
|
|
|
476,320
|
|
Other mortgage notes outstanding
(2)
|
|
|
65,754
|
|
|
|
87,317
|
|
Mortgage notes receivable, gross
|
|
|
708,214
|
|
|
|
676,137
|
|
Allowance for loss on mortgage notes receivable
(3)
|
|
|
(4,905
|
)
|
|
|
(4,905
|
)
|
Total mortgages — net
|
|
$
|
703,309
|
|
|
$
|
671,232
|
|
|
(1)
|
Approximates the weighted average interest rate on 39 facilities.
Two notes totaling approximately $15.2 million are construction mortgages maturing in 2018 and 2019. The remaining loan balance
matures in 2029.
|
|
(2)
|
Other mortgage notes outstanding have a weighted average
interest rate of 11.25% per annum and maturity dates between 2018 and 2028.
|
|
(3)
|
The allowance for loss on mortgage notes receivable relates
to one mortgage with an operator. The carrying value and fair value of the mortgage note receivable is approximately $1.5 million
at June 30, 2018 and December 31, 2017.
|
$112.5 Million of Mortgage Note due
2027
On January 17, 2014,
we entered into a $112.5 million first mortgage loan with an existing operator. The loan is secured by 7 SNFs and 2 ALFs located
in Pennsylvania (7) and Ohio (2). The mortgage is cross-defaulted and cross-collateralized with our existing master lease with
the operator. In March 2018, we extended the maturity date to January 31, 2027 and provided an option to extend the maturity for
a five year period through January 31, 2032 and a second option to extend the maturity for a two year period through September
30, 2034.
$530.0 Million of Mortgage Notes due
2029
On June 30, 2014, we
entered into a mortgage loan agreement with Ciena Healthcare (“Ciena”) to refinance/consolidate $117 million in existing
mortgages with maturity dates ranging from 2021 to 2023 on 17 facilities into one mortgage and simultaneously provide mortgage
financing for an additional 14 facilities. The $415 million mortgage (the “Master Mortgage”) matures in 2029 and is
secured by 30 facilities. The Master Mortgage note bore an initial interest rate of 9.0% per annum which increases each year by
0.225% per annum. As of June 30, 2018, the outstanding principal balance of the Master Mortgage note is approximately $410.0 million
and the interest rate is 9.68% per annum.
Subsequent to June
30, 2014, the Company amended its Master Mortgage with Ciena to provide for additional borrowings in the form of incremental facility
mortgages, construction and/or improvement mortgages with maturity dates in 2018, 2019 and 2029 with initial annual interest rates
ranging between 8.5% and 10% and fixed annual escalators of 2% or 2.5% over the prior year’s interest rate, or a fixed increase
of 0.225% per annum. As of June 30, 2018 the outstanding principal balance of these mortgage notes are approximately $75.8 million.
In June 2018, we
amended the Master Mortgage with the addition of a $44.7 million mortgage note related to five SNFs located in Michigan. The mortgage
note matures on June 30, 2029 and bears an initial annual interest rate of 9.5% which increases each year by 0.225%. As of June
30, 2018 the outstanding principal balance of this mortgage note is approximately $44.2 million. Additionally, the Company committed
to fund an additional $9.6 million to Ciena if certain performance metrics are achieved by the portfolio.
The mortgage notes with Ciena are cross-defaulted
and cross-collateralized with our existing master lease and other investment notes with the operator.
Mortgage notes paid off
In January 2018, one
of our operators repaid two construction loans with a total outstanding balance of approximately $21.2 million. These construction
loans bore interest at 8.75%.
NOTE 5 – OTHER INVESTMENTS
A summary of our other
investments is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Other investment notes due 2018-2022; interest at 8.29%
(1)
|
|
$
|
39,984
|
|
|
$
|
15,115
|
|
Other investment notes due 2018-2023; interest at 10.59%
(1)
|
|
|
39,166
|
|
|
|
40,985
|
|
Other investment notes due 2020; interest at 13.05%
(1)
|
|
|
68,175
|
|
|
|
49,490
|
|
Other investment note due 2021; interest at 6.00%
|
|
|
39,689
|
|
|
|
7,000
|
|
Other investment notes due 2023-2030; interest at 7.24%
(1)
|
|
|
62,800
|
|
|
|
64,050
|
|
Other investment note due 2023; interest at 12.00%
|
|
|
59,324
|
|
|
|
49,708
|
|
Other investment notes due 2024-2025; interest at 8.52%
(1)
|
|
|
41,987
|
|
|
|
31,987
|
|
Other investment notes outstanding
(2)
|
|
|
26,081
|
|
|
|
18,380
|
|
Other investments, gross
|
|
|
377,206
|
|
|
|
276,715
|
|
Allowance for loss on other investments
(3)
|
|
|
-
|
|
|
|
(373
|
)
|
Total other investments
|
|
$
|
377,206
|
|
|
$
|
276,342
|
|
|
(1)
|
Approximate weighted average interest rate as of June 30,
2018.
|
|
(2)
|
Other investment notes have a weighted average interest
rate of 8.55% and maturity dates through 2028.
|
|
(3)
|
The allowance for loss on other investments relates to
one loan with an operator that was fully reserved at December 31, 2017 and written off during the second quarter of 2018.
|
Other investment notes due 2018 - 2022
In March 2018, we agreed
to provide senior secured superpriority DIP financing to Orianna consisting of a $14.2 million term loan and a $15.8 million revolving
credit facility. The DIP financing has been approved by the Bankruptcy Court. The DIP financing is secured by a security interest
in and liens on substantially all of Orianna’s existing and future real and personal property. The $14.2 million term loan
bears interest at 1-month LIBOR plus 5.5% per annum and matures on September 30, 2018. Orianna has borrowed the full amount of
the term loan to repay their previous secured working capital lender. As of June 30, 2018, approximately $14.2 million is outstanding
on this term loan. The $15.8 million revolving credit facility bears interest at 1-month LIBOR plus 9.0% per annum and matures
on September 30, 2018. The borrowings under the revolving credit facility are to be used for general business expenses and other
uses permitted under the loan documents. As of June 30, 2018, approximately $10.5 million is outstanding on this revolving credit
facility. On July 23, 2018, we notified Orianna that it was in default under the DIP facility. See Note 19 – Subsequent Events.
In May 2017, we provided Orianna an $18.8
million maximum borrowing secured revolving working capital loan that bears interest at 9% per annum (with one-half (1/2) of all
accrued interest to be paid-in-kind and added to the loan balance) and matures on April 30, 2022. This revolving working capital
loan has a default rate of 5% per annum. As of June 30, 2018, approximately $15.2 million is outstanding on this revolving working
capital loan. Pursuant to the Bankruptcy Court’s interim order approving the DIP financing, Orianna is obligated to pay one-half
(1/2) of all accrued post-bankruptcy interest payable on this revolving working capital loan at the default rate. As of June 30,
2018, our total other investments outstanding with Orianna was approximately $40.0 million.
Other investment notes due 2020
On July 29, 2016, we
provided Genesis HealthCare, Inc. (“Genesis”) a $48.0 million secured term loan bearing interest at LIBOR with a floor
of 1% plus 13% maturing on July 29, 2020. The $48.0 million term loan (and the $16.0 million term loan discussed below) is secured
by a perfected first priority lien on and security interest in certain collateral of Genesis. The term loan required monthly principal
payments of $0.25 million through July 2019, and $0.5 million from August 2019 through maturity. In addition, a portion of the
monthly interest accrued to the outstanding principal balance of the loan. In November 2017, we provided Genesis forbearance through
February 2018. The forbearance allowed for the deferral of principal payments and permitted Genesis to accrue all interest due
to the outstanding principal balance of the loan.
On March 6, 2018, we
amended certain terms of the $48.0 million secured term loan. As of February 22, 2018, the $48.0 million term loan bears interest
at a fixed rate of 14% per annum, of which 9% per annum will be paid-in-kind. Additionally, the amended term loan does not require
monthly payments of principal. All principal and accrued and unpaid interest will be due at maturity on July 29, 2020. As of June
30, 2018, approximately $52.0 million is outstanding on this term loan.
Also on March 6, 2018,
we provided Genesis an additional $16.0 million secured term loan bearing interest at a fixed rate of 10% per annum, of which 5%
per annum will be paid-in-kind and matures on July 29, 2020. As of June 30, 2018, approximately $16.2 million is outstanding on
this term loan. As of June 30, 2018, our total other investments outstanding with Genesis was approximately $68.2 million.
Other investment note due 2021
Simultaneously, with
the sale of 12 SNFs to subsidiaries of an existing operator we provided a principal of the existing operator a $39.7 million unsecured
loan bearing interest at 6% per annum that matures on May 31, 2021. Commencing October 1, 2018 and the first day of each subsequent
quarter, the loan requires principal payments of $0.6 million and additional quarterly principal payments of $0.3 million in the
future. The borrower has one option to extend the loan to May 31, 2024 subject to an extension fee. A $7.0 million loan provided
to the same principal in 2017 was repaid with proceeds from the $39.7 million loan. As of June 30, 2018, our total other investments
outstanding with this principal borrower was approximately $39.7 million.
Other investment note due 2023
On February 26, 2016,
we acquired and funded a $50.0 million mezzanine loan at a discount of approximately $0.75 million. In May 2018, the Company amended
the mezzanine loan with the borrower which is secured by an equity interest in subsidiaries of the borrower. As part of the refinancing,
the Company increased the mezzanine loan by $10.0 million, extended the maturity date to May 31, 2023 and fixed the interest rate
at 12% per annum. The mezzanine loan requires semi-annual principal payments of $2.5 million commencing December 31, 2018 (payments
due each December 31 and June 30). As of June 30, 2018, our total other investments outstanding with this borrower was approximately
$59.3 million. In connection with the amendment, the Company recognized fees of approximately $1.1 million of which $0.5 million
was paid at closing with the remainder due at maturity. The discount and loan fee are deferred and recognized on an effective basis
over the term of the loan.
Other investment note due 2024-2025
On September 30, 2016,
we acquired and amended a term loan with a fair value of approximately $37.0 million with Agemo Holdings LLC (“Agemo”
an entity formed in May 2018 to silo the leases and loans formerly held by Signature Healthcare). A $5.0 million tranche of the
term loan that bore interest at 13% per annum was repaid in August 2017. The remaining $32.0 million tranche of the term loan bears
interest at 9% per annum and currently matures on December 31, 2024. The $32.0 million term loan (and the $25.0 million working
capital loan discussed below) is secured by a security interest in the collateral of Agemo.
On May 7, 2018, the
Company provided Agemo a $25.0 million secured working capital loan bearing interest at 7% per annum that matures on April 30,
2025. The proceeds of the working capital loan are for paying operating expenses, settlement payments, fees, taxes and other costs
approved by the Company. As of June 30, 2018, approximately $10.0 million is outstanding on this working capital loan. Our total
loans outstanding with Agemo at June 30, 2018 approximate $42.0 million.
On May 7, 2018, the
Company also provided principals of Agemo a one year unsecured $2.8 million loan. The proceeds were used to pay down contractual
receivables outstanding.
Other investments note
On December 28, 2017,
we provided $10.0 million of financing to a third-party to acquire ten SNFs previously owned by us. The loan bears interest at
10% per annum and requires principal payments of $5.0 million in December 2018, $2.0 million in December 2019 and $3.0 million
at maturity in December 2020. In March 2018, the third-party buyer repaid $5.0 million related to this financing.
NOTE 6 – VARIABLE INTEREST ENTITIES
As of June 30, 2018,
Orianna and Agemo are VIEs. Below is a summary of our assets and liabilities associated with each operator as of June 30, 2018:
|
|
Operator
|
|
|
|
Orianna
|
|
|
Agemo
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
Real estate investments - net
|
|
$
|
37,286
|
|
|
$
|
409,450
|
|
Investments in direct financing leases - net
|
|
|
337,705
|
|
|
|
-
|
|
Other investments - net
|
|
|
39,984
|
|
|
|
41,987
|
|
Contractual receivables - net
|
|
|
279
|
|
|
|
17,574
|
|
Straight-line rent receivables
|
|
|
-
|
|
|
|
28,737
|
|
Above market lease
|
|
|
-
|
|
|
|
4
|
|
Subtotal
|
|
|
415,254
|
|
|
|
497,752
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
|
-
|
|
|
|
(9,253
|
)
|
Subtotal
|
|
|
-
|
|
|
|
(9,253
|
)
|
|
|
|
|
|
|
|
|
|
Collateral
|
|
|
|
|
|
|
|
|
Personal guarantee
|
|
|
-
|
|
|
|
(15,000
|
)
|
Other collateral
|
|
|
(399,926
|
)
|
|
|
(409,450
|
)
|
Subtotal
|
|
|
(399,926
|
)
|
|
|
(424,450
|
)
|
|
|
|
|
|
|
|
|
|
Maximum exposure to loss
|
|
$
|
15,328
|
|
|
$
|
64,049
|
|
In determining our maximum exposure to
loss from these VIEs, we considered the underlying fair value of the real estate subject to leases with these operators and other
collateral, if any, supporting our other investments, which may include accounts receivable, security deposits, letters of credit
or personal guarantees, if any. See Note 5 – Other Investments regarding the terms of other investments with these two operators.
The Company has also committed to provide Agemo with up to approximately $13.6 million of capital expenditure funding through 2021
to be used for general maintenance and capital improvements for our facilities. As of June 30, 2018, approximately $13.1 million
of the $13.6 million remains unfunded by the Company.
The table below reflects
our total revenues from Orianna and Agemo for the three and six months ended June 30, 2018:
|
|
Three Months Ended June 30, 2018
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
Operator
|
|
|
Operator
|
|
|
|
Orianna
|
|
|
Agemo
|
|
|
Orianna
|
|
|
Agemo
|
|
|
|
(in thousands)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
-
|
|
|
$
|
14,860
|
|
|
$
|
-
|
|
|
$
|
29,711
|
|
Other investment income
|
|
|
1,145
|
|
|
|
828
|
|
|
|
1,664
|
|
|
|
1,548
|
|
Total
|
|
$
|
1,145
|
|
|
$
|
15,688
|
|
|
$
|
1,664
|
|
|
$
|
31,259
|
|
NOTE 7 – INVESTMENT IN UNCONSOLIDATED
JOINT VENTURE
On November 1, 2016,
we invested approximately $50.0 million for an approximate 15% ownership interest in a joint venture operating as Second Spring
Healthcare Investments. The other approximate 85% interest is owned by affiliates of Lindsey Goldberg LLC. We account for our investment
in the joint venture using the equity method. On November 1, 2016, the joint venture acquired 64 SNFs for approximately $1.1 billion
and leased them to Genesis. During the second quarter of 2018, the joint venture sold 12 SNF facilities subject to an operating
lease for approximately $149.3 million in net cash proceeds and recognized a loss on sale of approximately $4.4 million.
We receive asset management
fees from the joint venture for services provided. For the three months ended June 30, 2018 and 2017, we recognized $0.5 million
of asset management fees in each period. For the six months ended June 30, 2018 and 2017, we recognized $1.0 million of asset management
fees in each period. These fees are included in miscellaneous income in the accompanying Consolidated Statements of Operations.
The accounting policies for the unconsolidated joint venture are the same as those of the Company.
NOTE 8 – ASSETS HELD FOR SALE
The following is a summary of our assets
held for sale:
|
|
Properties Held For Sale
|
|
|
|
Number
|
|
|
Net Book
|
|
|
|
of
|
|
|
Value
|
|
|
|
Properties
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
22
|
|
|
$
|
86,699
|
|
Properties sold/other
(1)
|
|
|
(5
|
)
|
|
|
(9,307
|
)
|
Properties added
(2)
|
|
|
16
|
|
|
|
66,027
|
|
March 31, 2018
|
|
|
33
|
|
|
|
143,419
|
|
Properties sold/other
(1)
|
|
|
(33
|
)
|
|
|
(143,419
|
)
|
Properties added
(2)
|
|
|
3
|
|
|
|
3,782
|
|
June 30, 2018
(3)
|
|
|
3
|
|
|
$
|
3,782
|
|
|
(1)
|
In the first quarter of 2018, we sold five facilities for
approximately $13.1 million in net cash proceeds recognizing a gain on sale of approximately $3.5 million. In the second quarter
of 2018, we sold 33 facilities for approximately $96.4 million in net cash proceeds recognizing a gain on sale of approximately
$3.5 million.
|
|
(2)
|
In the first quarter of 2018, we recorded $3.5 million
of impairments to reduce 16 facilities and one ancillary building’s net book value to their estimated fair values less costs
to sell before they were reclassified to assets held for sale. In the second quarter of 2018, we recorded approximately $2.5 million
of impairments to reduce three facilities net book value to their estimated fair values less cost to sell before they were reclassified
to assets held for sale.
|
|
(3)
|
We plan to sell the facilities classified as assets held
for sale at June 30, 2018 within the next twelve months.
|
NOTE 9 – INTANGIBLES
The following
is a summary of our intangibles as of June 30, 2018 and December 31, 2017
:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
644,369
|
|
|
$
|
644,690
|
|
|
|
|
|
|
|
|
|
|
Above market leases
|
|
$
|
22,426
|
|
|
$
|
22,426
|
|
In-place leases
|
|
|
167
|
|
|
|
167
|
|
Accumulated amortization
|
|
|
(17,541
|
)
|
|
|
(17,059
|
)
|
Net intangible assets
|
|
$
|
5,052
|
|
|
$
|
5,534
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Below market leases
|
|
$
|
161,286
|
|
|
$
|
164,443
|
|
Accumulated amortization
|
|
|
(89,584
|
)
|
|
|
(83,824
|
)
|
Net intangible liabilities
|
|
$
|
71,702
|
|
|
$
|
80,619
|
|
Above market leases
and in-place leases, net of accumulated amortization, are included in other assets on our Consolidated Balance Sheets. Below market
leases, net of accumulated amortization, are included in accrued expenses and other liabilities on our Consolidated Balance Sheets.
The net amortization related to the above and below market leases is included in our Consolidated Statements of Operations as an
adjustment to rental income.
For the three months
ended June 30, 2018 and 2017, our net amortization related to intangibles was $2.6 million and $3.1 million, respectively. For
the six months ended June 30, 2018 and 2017, our net amortization related to intangibles was $5.3 million and $6.2 million, respectively.
The estimated net amortization related to these intangibles for the remainder of 2018 and the subsequent four years is as follows:
remainder of 2018 – $4.3 million; 2019 – $8.2 million; 2020 – $8.0 million; 2021– $7.6 million and 2022
– $7.0 million. As of June 30, 2018, the weighted average remaining amortization period of above market leases and below
market leases is approximately seven years and nine years, respectively.
The following is a summary of our goodwill as of June 30, 2018:
|
|
(in thousands)
|
|
Balance as of December 31, 2017
|
|
$
|
644,690
|
|
Less: foreign currency translation
|
|
|
(321
|
)
|
Balance as of June 30, 2018
|
|
$
|
644,369
|
|
NOTE 10 – CONCENTRATION OF RISK
As of June 30, 2018,
our portfolio of real estate investments consisted of 936 healthcare facilities, located in 41 states and the U.K. and operated
by 67 third-party operators. Our investment in these facilities, net of impairments and allowances, totaled approximately $8.6
billion at June 30, 2018, with approximately 99% of our real estate investments related to long-term care facilities. Our portfolio
is made up of 748 SNFs, 117 ALFs, 14 specialty facilities, one medical office building, fixed rate mortgages on 51 SNFs and two
ALFs, and three facilities that are held for sale. At June 30, 2018, we also held other investments of approximately $377.2 million,
consisting primarily of secured loans to third-party operators of our facilities and a $32.8 million investment in an unconsolidated
joint venture.
At June 30, 2018, we
had investments with one operator/or manager that exceeded 10% of our total investments: Ciena. Ciena also generated approximately
10% of our total revenues for the three and six months ended June 30, 2018 and 2017. At June 30, 2018, the three states in which
we had our highest concentration of investments were Texas (10%), Florida (10%) and Michigan (8%).
NOTE 11 – STOCKHOLDERS’/OWNERS’ EQUITY
The Board of Directors has declared common
stock dividends as set forth below:
Record
|
|
Payment
|
|
Dividend per
|
|
Date
|
|
Date
|
|
Common Share
|
|
January 31, 2018
|
|
February 15, 2018
|
|
$
|
0.66
|
|
April 30, 2018
|
|
May 15, 2018
|
|
|
0.66
|
|
July 31, 2018
|
|
August 15, 2018
|
|
|
0.66
|
|
On the same dates listed above, Omega OP
Unit holders received the same distributions per unit as those paid to the common stockholders of Omega.
$500 Million Equity Shelf Program
For the three months
ended June 30, 2018, we issued 0.9 million shares of our common stock at an average price of $30.19 per share, net of issuance
costs, generating net proceeds of $27.5 million under our $500 million Equity Shelf Program. For the six months ended June 30,
2018, we issued 0.9 million shares of our common stock at an average price of $30.16 per share, net of issuance costs, generating
net proceeds of $27.5 million under our $500 million Equity Shelf Program.
Dividend Reinvestment and Common Stock
Purchase Plan
For the three months
ended June 30, 2018, approximately 0.8 million shares of our common stock at an average price of $29.22 per share were issued through
our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $22.2 million. For the six months
ended June 30, 2018, approximately 0.9 million shares of our common stock at an average price of $28.55 per share were issued through
our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $27.1 million.
Accumulated Other Comprehensive Loss
The following is a summary of our accumulated
other comprehensive loss, net of tax where applicable:
|
|
As of and For the
|
|
|
As of and For the
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Foreign Currency Translation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(11,015
|
)
|
|
$
|
(50,614
|
)
|
|
$
|
(25,993
|
)
|
|
$
|
(54,948
|
)
|
Translation (loss) gain
|
|
|
(24,383
|
)
|
|
|
10,195
|
|
|
|
(9,464
|
)
|
|
|
14,468
|
|
Realized (loss) gain
|
|
|
(66
|
)
|
|
|
79
|
|
|
|
(7
|
)
|
|
|
140
|
|
Ending balance
|
|
|
(35,464
|
)
|
|
|
(40,340
|
)
|
|
|
(35,464
|
)
|
|
|
(40,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
5,951
|
|
|
|
(166
|
)
|
|
|
1,463
|
|
|
|
(1,420
|
)
|
Unrealized gain (loss)
|
|
|
1,735
|
|
|
|
(1,840
|
)
|
|
|
5,970
|
|
|
|
(1,350
|
)
|
Realized gain
(1)
|
|
|
53
|
|
|
|
626
|
|
|
|
306
|
|
|
|
1,390
|
|
Ending balance
|
|
|
7,739
|
|
|
|
(1,380
|
)
|
|
|
7,739
|
|
|
|
(1,380
|
)
|
Net investment hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(12,219
|
)
|
|
|
-
|
|
|
|
(7,110
|
)
|
|
|
-
|
|
Unrealized gain (loss)
|
|
|
8,296
|
|
|
|
(2,193
|
)
|
|
|
3,187
|
|
|
|
(2,193
|
)
|
Ending balance
|
|
|
(3,923
|
)
|
|
|
(2,193
|
)
|
|
|
(3,923
|
)
|
|
|
(2,193
|
)
|
Total accumulated other comprehensive loss for Omega OP
(2)
|
|
|
(31,648
|
)
|
|
|
(43,913
|
)
|
|
|
(31,648
|
)
|
|
|
(43,913
|
)
|
Add: portion included in noncontrolling interest
|
|
|
1,491
|
|
|
|
2,010
|
|
|
|
1,491
|
|
|
|
2,010
|
|
Total accumulated other comprehensive loss for Omega
|
|
$
|
(30,157
|
)
|
|
$
|
(41,903
|
)
|
|
$
|
(30,157
|
)
|
|
$
|
(41,903
|
)
|
|
(1)
|
Recorded in interest expense on the Consolidated Statements
of Operations.
|
|
(2)
|
These amounts are included in owners’ equity.
|
NOTE 12 – TAXES
Omega is a REIT for
United States federal income tax purposes, and Omega OP is a pass through entity for United States federal income tax purposes.
Since our inception,
Omega has elected to be taxed as a REIT under the applicable provisions of the Internal Revenue Code (“Code”). A REIT
is generally not subject to federal income tax on that portion of its REIT taxable income which is distributed to its stockholders,
provided that at least 90% of such taxable income is distributed each tax year and certain other requirements are met, including
asset and income tests. So long as we qualify as a REIT under the Code, we generally will not be subject to federal income taxes
on the REIT taxable income that we distribute to stockholders, subject to certain exceptions.
If the Company fails
to qualify as a REIT in any taxable year, the Company will be subject to federal income taxes on its taxable income at regular
corporate rates and dividends paid to our stockholders will not be deductible by us in computing taxable income. Further, we would
not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which
qualification is denied, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify
as a REIT could materially and adversely affect the Company’s net income; however, we believe we are organized and operate
in such a manner as to qualify for treatment as a REIT. We test our compliance within the REIT taxation rules to ensure that we
are in compliance with the REIT rules on a quarterly and annual basis. We review our distributions and projected distributions
each year to ensure we have met and will continue to meet the annual REIT distribution requirements. In 2018, we expect to pay
dividends in excess of our taxable income.
Subject to the limitation
under the REIT asset test rules, we are permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”).
We have elected for two of our active subsidiaries to be treated as TRSs. One of our TRSs is subject to federal, state and local
income taxes at the applicable corporate rates and the other is subject to foreign income taxes. As of June 30, 2018, our TRS that
is subject to federal, state and local income taxes at the applicable corporate rates had a net operating loss carry-forward of
approximately $5.8 million. The loss carry-forward is fully reserved as of June 30, 2018, with a valuation allowance due to uncertainties
regarding realization. Our net operating loss carryforwards will be carried forward for no more than 20 years.
For the three months
ended June 30, 2018 and 2017, we recorded approximately $0.2 million and $0.5 million, respectively, of state and local income
tax provision. For the six months ended June 30, 2018 and 2017, we recorded approximately $0.3 million and $1.5 million, respectively,
of state and local income tax provision. For the three months ended June 30, 2018 and 2017, we recorded approximately $0.6 million
and $0.1 million, respectively, of tax provision for foreign income taxes. For the six months ended June 30, 2018 and 2017, we
recorded approximately $1.0 million and $0.2 million, respectively, of tax provision for foreign income taxes. The expenses were
included in income tax expense on our Consolidated Statements of Operations.
On December 22, 2017,
the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act includes numerous changes to existing U.S. tax law,
including lowering the statutory U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company
has completed its preliminary assessment of these changes, and has determined that there is an immaterial impact to the consolidated
financial statements.
NOTE 13 – STOCK-BASED COMPENSATION
On June 8, 2018, at
our Company’s Annual Meeting, our stockholders approved the 2018 Stock Incentive Plan (the “2018 Plan”), which
amended and restated the Company’s 2013 Stock Incentive Plan (the “2013 Plan”). The 2018 Plan is a comprehensive
incentive compensation plan that allows for various types of equity-based compensation, including restricted stock units (including
performance-based restricted stock units), stock awards (including restricted stock), deferred restricted stock units, incentive
stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, performance unit awards, certain
cash-based awards (including performance-based cash awards) and other stock-based awards. The 2018 Plan increases the number of
shares of common stock available for issuance under the 2013 Plan by 4.5 million.
The following is a summary of our stock-based
compensation expense for the three and six months ended June 30, 2018 and 2017, respectively:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Stock-based compensation expense
|
|
$
|
4,089
|
|
|
$
|
3,734
|
|
|
$
|
8,145
|
|
|
$
|
7,478
|
|
Restricted Stock and Restricted Stock Units
Restricted stock and
restricted stock units (“RSUs”) are subject to forfeiture if the holder’s service to us terminates prior to vesting,
subject to certain exceptions for certain qualifying terminations of service or a change in control of the Company. Prior to vesting,
ownership of the shares/units cannot be transferred. Restricted stock has the same dividend and voting rights as our common stock.
RSUs accrue dividend equivalents but have no voting rights. Restricted stock and RSUs are valued at the price of our common stock
on the date of grant. We expense the cost of these awards ratably over their vesting period. We awarded 169,900 RSUs to employees
on January 1, 2018.
Performance Restricted Stock Units and LTIP Units
Performance restricted stock units (“PRSUs”)
and long term incentive plan units (“LTIP Units”) are subject to forfeiture if the performance requirements are not
achieved or if the holder’s service to us terminates prior to vesting, subject to certain exceptions for certain qualifying
terminations of employment or a change in control of the Company. The PRSUs and the LTIP Units have varying degrees of performance
requirements to achieve vesting, and each PRSU and LTIP Units award represents the right to a variable number of shares of common
stock or partnership units. Each LTIP Unit once earned and vested is convertible into one Omega OP Unit in Omega OP, subject to
certain conditions. The vesting requirements are based on either the (i) total shareholder return (“TSR”) of Omega
or (ii) Omega’s TSR relative to other real estate investment trusts in the MSCI U.S. REIT Index for awards before 2016 and
in the FTSE NAREIT Equity Health Care Index for awards granted in or after 2016 (both “Relative TSR”). Vesting, in
general, requires that the employee remain employed by us until the date specified in the applicable PRSU or LTIP agreement, which
may be later than the date that the TSR or Relative TSR requirements are satisfied. We expense the cost of these awards ratably
over their service period.
Prior to vesting and
the distribution of shares, ownership of the PRSUs cannot be transferred. Dividends on the PRSUs are accrued and only paid to the
extent the applicable performance requirements are met. While each LTIP Unit is unearned, the employee receives a partnership distribution
equal to 10% of the quarterly approved regular periodic distributions per Omega OP Unit. The remaining partnership distributions
(which in the case of normal periodic distributions is equal to the total approved quarterly dividend on Omega’s common stock)
on the LTIP Units accumulate, and if the LTIP Units are earned, the accumulated distributions are paid.
The number of shares
or units earned under the TSR PRSUs or LTIP Units depends generally on the level of achievement of Omega’s TSR over the indicated
performance period. We awarded 677,488 LTIP Units to employees on January 1, 2018.
The number of shares
earned under the Relative TSR PRSUs depends generally on the level of achievement of Omega’s TSR relative to other real estate
investment trusts in the MSCI U.S. REIT Index or FTSE NAREIT Equity Health Care Index TSR over the performance period indicated.
We awarded 334,544 Relative TSR PRSUs to employees on January 1, 2018.
The following table
summarizes our total unrecognized compensation cost as of June 30, 2018 associated with RSUs, PRSU awards, and LTIP Unit awards
to employees:
|
|
|
|
|
|
|
Grant Date
|
|
|
Total
|
|
|
Weighted Average
|
|
|
Unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Compensation
|
|
|
Period of Expense
|
|
|
Compensation
|
|
|
|
|
|
|
|
Grant
|
|
Shares
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Recognition
|
|
|
Cost
|
|
|
Performance
|
|
Vesting
|
|
|
Year
|
|
/
Units
|
|
|
Per
Unit/ Share
|
|
|
(in
millions)
(1)
|
|
|
(in
months)
|
|
|
(in
millions)
|
|
|
Period
|
|
Dates
|
RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/17/16 RSU
|
|
2016
|
|
|
130,006
|
|
|
$
|
34.78
|
|
|
$
|
4.50
|
|
|
|
33
|
|
|
$
|
0.80
|
|
|
N/A
|
|
12/31/2018
|
1/1/2017 RSU
|
|
2017
|
|
|
140,416
|
|
|
|
31.26
|
|
|
|
4.40
|
|
|
|
36
|
|
|
|
2.20
|
|
|
N/A
|
|
12/31/2019
|
1/1/2018 RSU
|
|
2018
|
|
|
169,900
|
|
|
|
27.54
|
|
|
|
4.70
|
|
|
|
36
|
|
|
|
3.90
|
|
|
N/A
|
|
12/31/2020
|
Restricted
Stock Units Total
|
|
|
|
|
440,322
|
|
|
$
|
30.86
|
|
|
$
|
13.60
|
|
|
|
|
|
|
$
|
6.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSR PRSUs and LTIP Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/31/15 2017 LTIP Units
|
|
2015
|
|
|
137,249
|
|
|
$
|
14.66
|
|
|
$
|
2.00
|
|
|
|
45
|
|
|
$
|
0.30
|
|
|
1/1/2015-12/31/2017
|
|
Quarterly in 2018
|
4/1/2015 2017 LTIP Units
|
|
2015
|
|
|
53,387
|
|
|
|
14.81
|
|
|
|
0.80
|
|
|
|
45
|
|
|
|
0.10
|
|
|
1/1/2015-12/31/2017
|
|
Quarterly in 2018
|
3/17/2016 2018 LTIP Units
|
|
2016
|
|
|
370,152
|
|
|
|
13.21
|
|
|
|
4.90
|
|
|
|
45
|
|
|
|
1.90
|
|
|
1/1/2016-12/31/2018
|
|
Quarterly in 2019
|
1/1/2017 2019 LTIP Units
|
|
2017
|
|
|
399,726
|
|
|
|
12.61
|
|
|
|
5.00
|
|
|
|
48
|
|
|
|
3.20
|
|
|
1/1/2017-12/31/2019
|
|
Quarterly in 2020
|
1/1/2018 2020 LTIP Units
|
|
2018
|
|
|
677,488
|
|
|
|
7.31
|
|
|
|
5.00
|
|
|
|
48
|
|
|
|
4.30
|
|
|
1/1/2018-12/31/2020
|
|
Quarterly in 2021
|
TSR PRSUs
& LTIP Total
|
|
|
|
|
1,638,002
|
|
|
$
|
10.80
|
|
|
$
|
17.70
|
|
|
|
|
|
|
$
|
9.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative TSR PRSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/31/15 2017 Relative TSR
|
|
2015
|
|
|
137,249
|
|
|
$
|
22.50
|
|
|
$
|
3.10
|
|
|
|
45
|
|
|
$
|
0.40
|
|
|
1/1/2015-12/31/2017
|
|
Quarterly in 2018
|
4/1/2015 2017 Relative TSR
|
|
2015
|
|
|
53,387
|
|
|
|
22.92
|
|
|
|
1.20
|
|
|
|
45
|
|
|
|
0.20
|
|
|
1/1/2015-12/31/2017
|
|
Quarterly in 2018
|
3/17/2016 2018 Relative TSR
|
|
2016
|
|
|
305,563
|
|
|
|
16.44
|
|
|
|
5.00
|
|
|
|
45
|
|
|
|
2.00
|
|
|
1/1/2016-12/31/2018
|
|
Quarterly in 2019
|
1/1/2017 2019 Relative TSR
|
|
2017
|
|
|
285,338
|
|
|
|
18.04
|
|
|
|
5.10
|
|
|
|
48
|
|
|
|
3.20
|
|
|
1/1/2017-12/31/2019
|
|
Quarterly in 2020
|
1/1/2018 2020 Relative TSR
|
|
2018
|
|
|
334,544
|
|
|
|
16.65
|
|
|
|
5.60
|
|
|
|
48
|
|
|
|
4.80
|
|
|
1/1/2018-12/31/2020
|
|
Quarterly in 2021
|
Relative
TSR PRSUs Total
|
|
|
|
|
1,116,081
|
|
|
$
|
17.97
|
|
|
$
|
20.00
|
|
|
|
|
|
|
$
|
10.60
|
|
|
|
|
|
Grand
Total
|
|
|
|
|
3,194,405
|
|
|
$
|
16.07
|
|
|
$
|
51.30
|
|
|
|
|
|
|
$
|
27.30
|
|
|
|
|
|
|
(1)
|
Total shares/units and compensation costs are net of shares/units
cancelled.
|
|
(2)
|
This table excludes approximately $1.5 million of unrecognized
compensation costs related to outstanding director restricted stock grants.
|
NOTE 14 – BORROWING ACTIVITIES AND ARRANGEMENTS
Secured and Unsecured Borrowings
The following is a summary of our borrowings:
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Maturity
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Secured borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HUD mortgages assumed December 2011
|
|
|
2044
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
53,666
|
|
Deferred financing costs – net
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(568
|
)
|
Total secured borrowings – net
(1)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
53,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
|
2021
|
|
|
|
3.29
|
%
|
|
|
220,000
|
|
|
|
290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. term loan
|
|
|
2022
|
|
|
|
3.54
|
%
|
|
|
425,000
|
|
|
|
425,000
|
|
Sterling term loan
(2)
|
|
|
2022
|
|
|
|
1.95
|
%
|
|
|
132,030
|
|
|
|
135,130
|
|
Omega OP term loan
(1)
|
|
|
2022
|
|
|
|
3.54
|
%
|
|
|
100,000
|
|
|
|
100,000
|
|
2015 term loan
|
|
|
2022
|
|
|
|
3.80
|
%
|
|
|
250,000
|
|
|
|
250,000
|
|
Discounts and deferred financing costs – net
(3)
|
|
|
|
|
|
|
|
|
|
|
(4,862
|
)
|
|
|
(5,460
|
)
|
Total term loans – net
|
|
|
|
|
|
|
|
|
|
|
902,168
|
|
|
|
904,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 notes
|
|
|
2023
|
|
|
|
4.375
|
%
|
|
|
700,000
|
|
|
|
700,000
|
|
2024 notes
|
|
|
2024
|
|
|
|
4.950
|
%
|
|
|
400,000
|
|
|
|
400,000
|
|
2025 notes
|
|
|
2025
|
|
|
|
4.500
|
%
|
|
|
400,000
|
|
|
|
400,000
|
|
2026 notes
|
|
|
2026
|
|
|
|
5.250
|
%
|
|
|
600,000
|
|
|
|
600,000
|
|
2027 notes
|
|
|
2027
|
|
|
|
4.500
|
%
|
|
|
700,000
|
|
|
|
700,000
|
|
2028 notes
|
|
|
2028
|
|
|
|
4.750
|
%
|
|
|
550,000
|
|
|
|
550,000
|
|
Other
|
|
|
2018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500
|
|
Subordinated debt
|
|
|
2021
|
|
|
|
9.000
|
%
|
|
|
20,000
|
|
|
|
20,000
|
|
Discount – net
|
|
|
|
|
|
|
|
|
|
|
(19,798
|
)
|
|
|
(21,073
|
)
|
Deferred financing costs – net
|
|
|
|
|
|
|
|
|
|
|
(24,313
|
)
|
|
|
(26,037
|
)
|
Total senior notes and other unsecured borrowings – net
|
|
|
|
|
|
|
|
|
|
|
3,325,889
|
|
|
|
3,324,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured borrowings - net
|
|
|
|
|
|
|
|
|
|
|
4,448,057
|
|
|
|
4,519,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured and unsecured borrowings – net
(4)
|
|
|
|
|
|
|
|
|
|
$
|
4,448,057
|
|
|
$
|
4,572,158
|
|
|
(1)
|
These amounts represent borrowings that were incurred by
Omega OP or wholly owned subsidiaries of Omega OP.
|
|
(2)
|
This borrowing is denominated in British Pounds Sterling.
|
|
(3)
|
The amount includes $0.5 million of net deferred financing
costs related to the Omega OP term loan as of June 30, 2018.
|
|
(4)
|
All borrowings are direct borrowings of Omega unless otherwise
noted.
|
HUD Mortgage Disposition
On June 1, 2018, subsidiaries
of an existing operator assumed approximately $53 million of our indebtedness guaranteed by HUD that secured 12 separate facilities
located in Arkansas. In connection with our disposition of the mortgages we wrote-off approximately $0.6 million of unamortized
deferred costs that are recorded in (Loss) gain on assets sold – net on our Consolidated Statement of Operations. These fixed
rate mortgages had a weighted average interest rate of approximately 3.06% per annum and matured in July 2044. See Note 2 –
Properties and Investments.
Certain of our other
secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As
of June 30, 2018 and December 31, 2017, we were in compliance with all affirmative and negative covenants, including financial
covenants, for our secured and unsecured borrowings. Omega OP, the guarantor of Parent’s outstanding senior notes, does not
directly own any substantive assets other than its interest in non-guarantor subsidiaries.
NOTE 15 – FINANCIAL INSTRUMENTS
The net carrying amount
of cash and cash equivalents, restricted cash, contractual receivables and accrued expenses and other liabilities reported in the
Consolidated Balance Sheets approximates fair value because of the short maturity of these instruments (Level 1).
At June 30, 2018 and December 31, 2017,
the net carrying amounts and fair values of our other financial instruments were as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in direct financing leases – net
|
|
$
|
349,465
|
|
|
$
|
349,465
|
|
|
$
|
364,965
|
|
|
$
|
364,965
|
|
Mortgage notes receivable – net
|
|
|
703,309
|
|
|
|
726,016
|
|
|
|
671,232
|
|
|
|
686,772
|
|
Other investments – net
|
|
|
377,206
|
|
|
|
373,842
|
|
|
|
276,342
|
|
|
|
281,031
|
|
Total
|
|
$
|
1,429,980
|
|
|
$
|
1,449,323
|
|
|
$
|
1,312,539
|
|
|
$
|
1,332,768
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
220,000
|
|
|
$
|
220,000
|
|
|
$
|
290,000
|
|
|
$
|
290,000
|
|
U.S. term loan
|
|
|
422,782
|
|
|
|
425,000
|
|
|
|
422,498
|
|
|
|
425,000
|
|
Sterling term loan
|
|
|
131,347
|
|
|
|
132,030
|
|
|
|
134,360
|
|
|
|
135,130
|
|
Omega OP term loan
(1)
|
|
|
99,488
|
|
|
|
100,000
|
|
|
|
99,423
|
|
|
|
100,000
|
|
2015 term loan
|
|
|
248,551
|
|
|
|
250,000
|
|
|
|
248,390
|
|
|
|
250,000
|
|
4.375% notes due 2023 – net
|
|
|
694,059
|
|
|
|
694,736
|
|
|
|
693,474
|
|
|
|
711,190
|
|
4.95% notes due 2024 – net
|
|
|
394,186
|
|
|
|
406,220
|
|
|
|
393,680
|
|
|
|
420,604
|
|
4.50% notes due 2025 – net
|
|
|
395,021
|
|
|
|
390,337
|
|
|
|
394,640
|
|
|
|
399,874
|
|
5.25% notes due 2026 – net
|
|
|
594,674
|
|
|
|
605,460
|
|
|
|
594,321
|
|
|
|
625,168
|
|
4.50% notes due 2027 – net
|
|
|
687,248
|
|
|
|
666,345
|
|
|
|
686,516
|
|
|
|
681,007
|
|
4.75% notes due 2028 – net
|
|
|
540,379
|
|
|
|
529,727
|
|
|
|
539,882
|
|
|
|
550,667
|
|
HUD debt – net
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
53,098
|
|
|
|
51,817
|
|
Subordinated debt – net
|
|
|
20,322
|
|
|
|
23,253
|
|
|
|
20,376
|
|
|
|
23,646
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500
|
|
|
|
1,500
|
|
Total
|
|
$
|
4,448,057
|
|
|
$
|
4,443,108
|
|
|
$
|
4,572,158
|
|
|
$
|
4,665,603
|
|
|
(1)
|
These amounts represent borrowings that were incurred by
Omega OP or wholly owned subsidiaries of Omega OP.
|
Fair value estimates are subjective in nature
and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates and relevant
comparable market information associated with each financial instrument (see Note 2 – Summary of Significant Accounting Policies
in our Annual Report on Form 10-K for the year ended December 31, 2017). The use of different market assumptions and estimation
methodologies may have a material effect on the reported estimated fair value amounts.
The following methods and assumptions were
used in estimating fair value disclosures for financial instruments.
|
·
|
Direct financing leases: The fair value of the investments in direct financing leases are estimated using a discounted cash
flow analysis, using interest rates being offered for similar leases to borrowers with similar credit ratings (Level 3). In addition,
the Company may estimate the fair value of its investment based on the estimated fair value of the collateral using a market approach
or an income approach which considers inputs such as, current and projected operating performance of the facilities, projected
rent, prevailing capitalization rates and/or coverages and bed values (Level 3).
|
|
·
|
Mortgage notes receivable: The fair value of the mortgage notes receivables are estimated using a discounted cash flow analysis,
using interest rates being offered for similar loans to borrowers with similar credit ratings (Level 3).
|
|
·
|
Other investments: Other investments are primarily comprised of notes receivable. The fair values of notes receivable are estimated
using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings
(Level 3).
|
|
·
|
Revolving line of credit and term loans: The fair value of our borrowings under variable rate agreements are estimated using
a present value technique based on expected cash flows discounted using the current market rates (Level 3).
|
|
·
|
Senior notes and subordinated debt: The fair value of our borrowings under fixed rate agreements are estimated using a present
value technique based on inputs from trading activity provided by a third-party (Level 2).
|
|
·
|
HUD debt: The fair value of our borrowings under HUD debt agreements are estimated using an expected
present value technique based on quotes obtained by HUD debt brokers (Level 2).
|
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Litigation
On November 16, 2017,
a purported securities class action complaint captioned Dror Gronich v. Omega Healthcare Investors, Inc., C. Taylor Pickett, Robert
O. Stephenson, and Daniel J. Booth was filed against the Company and certain of its officers in the United States District Court
for the Southern District of New York, Case No. 1:17-cv-08983-NRB (the “Gronich Securities Class Action”). On November
17, 2017, a second purported securities class action complaint captioned Steve Klein v. Omega Healthcare Investors, Inc., C. Taylor
Pickett, Robert O. Stephenson, and Daniel J. Booth was filed against the Company and the same officers in the United States District
Court for the Southern District of New York, Case No. 1:17-cv-09024-NRB (together with the Gronich Class Action, the “Securities
Class Action”). Thereafter, the Court considered a series of applications by various shareholders to be named lead plaintiff,
consolidated the two actions and designated Royce Setzer as the lead plaintiff.
Pursuant to a Scheduling
Order entered by the Court, lead plaintiff Setzer and additional plaintiff Earl Holtzman filed a Consolidated Amended Class Action
Complaint on May 25, 2018 (the “Amended Complaint”). The Securities Class Action purports to be a class action brought
on behalf of shareholders who acquired the Company’s securities between May 3, 2017 and October 31, 2017. The Securities
Class Action alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
by making materially false and/or misleading statements, and by failing to disclose material adverse facts about the Company’s
business, operations, and prospects, including the financial and operating results of one of the Company’s operators,
the ability of such operator to make timely rent payments, and the impairment of certain of the Company’s leases and the
uncollectibility of certain receivables. The Securities Class Action, which purports to assert claims for violations of Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act, seeks an unspecified
amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief. The Company and the officers
named in the Amended Complaint filed a Motion to Dismiss on July 17, 2018. Briefing on the Motion to Dismiss is to be completed
by September 14, 2018.
Although the Company
denies the material allegations of the Securities Class Action and intends to vigorously pursue its defense, we are in the very
early stages of this litigation and are unable to predict the outcome of the case or to estimate the amount of potential costs.
The Company’s
Board of Directors received a demand letter, dated April 9, 2018, from an attorney for a purported current shareholder of the Company
relating to the subject matter covered by the Securities Class Action (the “Shareholder Demand”). The letter demanded
that the Board of Directors conduct an investigation into the statements and other matters at issue in the Securities Class Action
and commence legal proceedings against each party identified as being responsible for the alleged activities. The Board of Directors
is reviewing the Shareholder Demand to determine the appropriate course of action.
In addition, we are
subject to various other legal proceedings, claims and other actions arising out of the normal course of business. While any legal
proceeding or claim has an element of uncertainty, management believes that the outcome of each lawsuit, claim or legal proceeding
that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position
or results of operations.
Commitments
We have committed to
fund the construction of new leased and mortgaged facilities and other capital improvements. We expect the funding of these commitments
to be completed over the next several years. Our remaining commitments at June 30, 2018, are outlined in the table below (in thousands):
Total commitment
|
|
$
|
730,009
|
|
Amounts funded
(1)
|
|
|
(450,050
|
)
|
Remaining commitment
|
|
$
|
279,959
|
|
|
(1)
|
Includes finance costs.
|
NOTE 17 – EARNINGS PER SHARE/UNIT
The computation of
basic earnings per share/unit (“EPS” or “EPU”) is computed by dividing net income available to common stockholders/Omega
OP Unit holders by the weighted-average number of shares of common stock/Omega OP Units outstanding during the relevant period.
Diluted EPS/EPU is computed using the treasury stock method, which is net income divided by the total weighted-average number of
common outstanding shares/Omega OP Units plus the effect of dilutive common equivalent shares/units during the respective period.
Dilutive common shares/Omega OP Units reflect the assumed issuance of additional common shares pursuant to certain of our share-based
compensation plans, including stock options, restricted stock and performance restricted stock units and the assumed issuance of
additional shares related to Omega OP Units held by outside investors. Dilutive Omega OP Units reflect the assumed issuance of
additional Omega OP Units pursuant to certain of our share-based compensation plans, including stock options, restricted stock
and performance restricted stock.
The following tables set forth the computation
of basic and diluted earnings per share/unit:
|
|
Omega
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81,986
|
|
|
$
|
68,157
|
|
|
$
|
169,919
|
|
|
$
|
177,269
|
|
Less: net income attributable to noncontrolling interests
|
|
|
(3,450
|
)
|
|
|
(2,900
|
)
|
|
|
(7,163
|
)
|
|
|
(7,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
78,536
|
|
|
$
|
65,257
|
|
|
$
|
162,756
|
|
|
$
|
169,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
199,497
|
|
|
|
197,433
|
|
|
|
199,204
|
|
|
|
197,223
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents
|
|
|
197
|
|
|
|
467
|
|
|
|
167
|
|
|
|
407
|
|
Noncontrolling interest – Omega OP Units
|
|
|
8,766
|
|
|
|
8,772
|
|
|
|
8,768
|
|
|
|
8,793
|
|
Denominator for diluted earnings per share
|
|
|
208,460
|
|
|
|
206,672
|
|
|
|
208,139
|
|
|
|
206,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
0.39
|
|
|
$
|
0.33
|
|
|
$
|
0.82
|
|
|
$
|
0.86
|
|
Earnings per share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.39
|
|
|
$
|
0.33
|
|
|
$
|
0.82
|
|
|
$
|
0.86
|
|
|
|
Omega OP
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81,986
|
|
|
$
|
68,157
|
|
|
$
|
169,919
|
|
|
$
|
177,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per unit
|
|
|
208,263
|
|
|
|
206,205
|
|
|
|
207,972
|
|
|
|
206,016
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Omega OP Unit equivalents
|
|
|
197
|
|
|
|
467
|
|
|
|
167
|
|
|
|
407
|
|
Denominator for diluted earnings per unit
|
|
|
208,460
|
|
|
|
206,672
|
|
|
|
208,139
|
|
|
|
206,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per unit – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to Omega OP Unit holders
|
|
$
|
0.39
|
|
|
$
|
0.33
|
|
|
$
|
0.82
|
|
|
$
|
0.86
|
|
Earnings per unit – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.39
|
|
|
$
|
0.33
|
|
|
$
|
0.82
|
|
|
$
|
0.86
|
|
NOTE 18 – SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENTS
OF CASH FLOWS
The following are supplemental disclosures
to the consolidated statements of cash flows for the six months ended June 30, 2018 and 2017:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Reconciliation of cash and cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,951
|
|
|
$
|
21,031
|
|
Restricted cash
|
|
|
2,598
|
|
|
|
12,203
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
13,549
|
|
|
$
|
33,234
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid during the period, net of amounts capitalized
|
|
$
|
108,317
|
|
|
$
|
97,610
|
|
Taxes paid during the period
|
|
$
|
2,072
|
|
|
$
|
2,032
|
|
|
|
|
|
|
|
|
|
|
Non cash investing activities
|
|
|
|
|
|
|
|
|
Non cash acquisition of real estate (See Note 2)
|
|
$
|
(880
|
)
|
|
$
|
(9,430
|
)
|
Non cash proceeds from sale of real estate investments (See Note 2)
|
|
|
53,118
|
|
|
|
-
|
|
Non cash investment in other investments (See Note 5)
|
|
|
(11,026
|
)
|
|
|
-
|
|
Non cash proceeds from other investments (see Note 5)
|
|
|
7,000
|
|
|
|
(6,353
|
)
|
Total
|
|
$
|
48,212
|
|
|
$
|
(15,783
|
)
|
|
|
|
|
|
|
|
|
|
Non cash financing activities
|
|
|
|
|
|
|
|
|
Non cash disposition of other long-term borrowings (See Note 14)
|
|
$
|
(53,118
|
)
|
|
$
|
-
|
|
Change in fair value of cash flow hedges
|
|
|
6,233
|
|
|
|
(108
|
)
|
Remeasurement of debt denominated in a foreign currency
|
|
|
(3,100
|
)
|
|
|
2,190
|
|
Total
|
|
$
|
(49,985
|
)
|
|
$
|
2,082
|
|
NOTE 19 – SUBSEQUENT EVENTS
On July 23, 2018, Omega
notified Orianna that it was in default under the DIP facility and, as a result of such default, Omega (a) declared the amounts
owing under the DIP facility to be immediately due and payable, (b) terminated the DIP facility and any further commitment of Omega
to extend credit to Orianna under the DIP facility, and (c) restricted Orianna’s use of cash collateral solely to payment
of those amounts contained in a budget approved by Omega. Omega also informed Orianna that while Omega did not (as of such date)
intend to immediately collect amounts owing under the DIP facility, Omega may at any time in the future exercise further rights
and remedies under the DIP facility.
On July 25, 2018,
Omega terminated the restructuring support agreement with its tenant 4 West Holdings and the sponsor of Orianna’s restructuring
plan. The Company is evaluating and/or pursuing alternative courses of action to protect its assets and shareholder value, and
working with operators to protect the interests of residents of the facilities. On July 1, 2018, we transitioned the legacy Orianna
portfolio in Mississippi (13 facilities) to an existing Omega operator with annual contractual rent of $12 million
and on August 1, 2018, a legacy Orianna facility in Indiana was transitioned to an existing operator with annual contractual rent
of $0.5 million.