This report combines the quarterly reports on Form 10-Q for the period ended June 30, ~~2018~~2019 of Omega Healthcare Investors, Inc. and OHI Healthcare Properties Limited Partnership (“Omega OP”). Unless stated otherwise or the context otherwise requires, (i) references to “Omega” or the “Company” means Omega Healthcare Investors, Inc. and its consolidated subsidiaries, (ii) references to “Parent” refer to Omega Healthcare Investors, Inc. without regard to its consolidated subsidiaries, and (iii) references to “Omega OP” means OHI Healthcare Properties Limited Partnership and its consolidated subsidiaries.

Omega is a self-administered real estate investment trust (“REIT”) under the Internal Revenue Code of 1986. Omega is structured as an umbrella partnership REIT (“UPREIT”) under which all of ~~Omega's~~Omega’s assets are owned directly or indirectly by, and all of ~~Omega's~~Omega’s operations are conducted directly or indirectly through, its operating partnership subsidiary, Omega OP.

Parent directly owned approximately ~~96%~~97% of the issued and outstanding partnership units in Omega OP (the “Omega OP Units”) at June 30, ~~2018.~~2019. Each Omega OP Unit (other than those owned by Parent) is redeemable at the election of the holder for cash equal to the then-fair market value of one share of common stock of Parent, subject to Parent’s election to exchange the Omega OP Units tendered for redemption for common stock of the Parent on a one-for-one basis in an unregistered transaction, subject to adjustment as set forth in the partnership agreement. The management of Parent consists of the same members as the management of Omega OP.

The financial results of Omega OP are consolidated into the financial statements of Omega. Omega has no significant assets other than its investments in Omega OP. Omega and Omega OP are managed and operated as one entity. Omega OP has no significant assets other than its interests in non-guarantor subsidiaries.

We believe it is important for investors to understand the few differences between Omega and Omega OP in the context of how we operate as a consolidated company. Omega acts as the general partner of Omega OP. Net proceeds from equity issuances by Parent are contributed to Omega OP in exchange for additional partnership units. Parent and Omega OP incur indebtedness. The net proceeds of the Parent’s borrowings are loaned to Omega OP. The outstanding senior notes and certain other debt of Parent is guaranteed by Omega OP.

The presentation of debt and related interest, including amounts accrued, stockholders’ equity, owners’ equity and noncontrolling interests are the main areas of difference between the consolidated financial statements of Omega and Omega OP. The differences between debt, stockholders’ equity and owners’ equity result from differences in the debt or equity issued at the Omega and Omega OP levels. With respect to owners’ equity, the units held by the partners in Omega OP other than the Parent are accounted for as owners’ equity in Omega OP’s financial statements and as noncontrolling interests in Omega’s financial statements. Although classified differently, total debt and equity of Omega and Omega OP are the same.

We believe combining the quarterly reports on Form 10-Q of Omega and Omega OP into this single report results in the following benefits:

In order to highlight the differences between Omega and Omega OP, the separate sections in this report for Omega and Omega OP specifically refer to Omega and Omega OP. In the sections that combine disclosure of Omega and Omega OP, this report refers to “we” and “us” actions or holdings as being “our” actions or holdings. Although Omega OP and its subsidiaries hold all of our assets, we believe that reference to “we,” “us” or “our” in this context is appropriate because the business is one enterprise and we operate substantially all of our business through Omega OP.

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OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

(in thousands)


	Three Months Ended					Six Months Ended
		June 30,				June 30,
	2019		2018		2019		2018
Net income	$	75,671	$	81,986	$	147,853	$	169,919
Other comprehensive (loss) income:
Foreign currency translation		(5,766)		(16,153)		(1,291)		(6,284)
Cash flow hedges		(5,384)		1,788		(8,087)		6,276
Total other comprehensive loss		(11,150)		(14,365)		(9,378)		(8)
Comprehensive income		64,521		67,621		138,475		169,911
Comprehensive income attributable to noncontrolling interest		(2,158)		(2,843)		(4,699)		(7,162)
Comprehensive income attributable to common stockholders	$	62,363	$	64,778	$	133,776	$	162,749

See notes to consolidated financial statements.

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OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~CHANGES IN EQUITY

Unaudited

(in thousands, except per share amounts)


	Common		Additional		Cumulative				Other		Total
	Stock		Paid-in		Net		Cumulative		Comprehensive		Stockholders’		Noncontrolling		Total
	Par Value		Capital		Earnings		Dividends		Loss		Equity		Interest		Equity
Balance at December 31, 2018 (202,346 common shares & 8,714 Omega OP Units)	$	20,235	$	5,074,544	$	2,130,511	$	(3,739,197)	$	(41,652)	$	3,444,441	$	320,043	$	3,764,484
Stock-based compensation expense		—		4,070		—		—		—		4,070		—		4,070
Vesting/exercising of equity compensation plan, net of tax withholdings (87 shares)		9		(2,288)		—		—		—		(2,279)		—		(2,279)
Dividend reinvestment and stock purchase plan (892 shares at an average of $36.19 per share)		89		32,196		—		—		—		32,285		—		32,285
Deferred compensation directors (9 shares at $33.95 per share)		—		53		—		—		—		53		—		53
Equity Shelf Program (2,221 shares at $34.46 per share, net of issuance costs)		222		76,325		—		—		—		76,547		—		76,547
Vesting/exercising of Omega OP Units (9 units)		—		(298)		—		—		—		(298)		298		—
Common dividends declared ($0.66 per share)		—		—		—		(136,687)		—		(136,687)		—		(136,687)
Conversion and redemption of Omega OP Units to common stock (1,446 shares at $38.92 per share)		145		56,112		—		—		—		56,257		(56,257)		—
Omega OP Units distributions		—		—		—		—		—		—		(7,013)		(7,013)
Noncontrolling interest - consolidated joint venture		—		—		—		—		—		—		228		228
Comprehensive income:
Foreign currency translation		—		—		—		—		4,321		4,321		154		4,475
Cash flow hedges		—		—		—		—		(2,610)		(2,610)		(93)		(2,703)
Net income		—		—		69,702		—		—		69,702		2,480		72,182
Total comprehensive income																73,954
Balance at March 31, 2019 (207,001 shares & 7,277 Omega OP Units)		20,700		5,240,714		2,200,213		(3,875,884)		(39,941)		3,545,802		259,840		3,805,642
Cumulative effect of accounting change						(8,198)						(8,198)		(292)		(8,490)
Balance at April 1, 2019 (207,001 common shares & 7,277 Omega OP Units)		20,700		5,240,714		2,192,015		(3,875,884)		(39,941)		3,537,604		259,548		3,797,152
Grant of restricted stock to company directors (18 shares at $36.25 per share)		2		(2)		—		—		—		—		—		—
Stock-based compensation expense		—		4,040		—		—		—		4,040		—		4,040
Vesting/exercising of equity compensation plan, net of tax withholdings (21 shares)		2		(680)		—		—		—		(678)		—		(678)
Dividend reinvestment and stock purchase plan (589 shares at an average of $37.02 per share)		59		21,759		—		—		—		21,818		—		21,818
Deferred compensation directors		—		55		—		—		—		55		—		55
Equity Shelf Program (733 shares at $35.90 per share, net of issuance costs)		73		26,249		—		—		—		26,322		—		26,322
Issuance of common stock - merger related (7,476 shares, net of tax withholding)		748		280,880								281,628		—		281,628
Vesting/exercising of Omega OP Units (54 units)		—		(2,102)		—		—		—		(2,102)		2,102		—
Common dividends declared ($0.66 per share)		—		—		—		(137,232)		—		(137,232)		—		(137,232)
Conversion and redemption of Omega OP Units to common stock (251 shares at $36.37 per share)		24		9,129		—		—		—		9,153		(9,153)		—
Omega OP Units distributions		—		—		—		—		—		—		(5,120)		(5,120)
Comprehensive income:
Foreign currency translation		—		—		—		—		(5,573)		(5,573)		(193)		(5,766)
Cash flow hedges		—		—		—		—		(5,205)		(5,205)		(179)		(5,384)
Net income		—		—		73,141		—		—		73,141		2,530		75,671
Total comprehensive income																64,521
Balance at June 30, 2019 (216,089 shares & 7,080 Omega OP Units)	$	21,608	$	5,580,042	$	2,265,156	$	(4,013,116)	$	(50,719)	$	3,802,971	$	249,535	$	4,052,506

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OMEGA HEALTHCARE INVESTORS, INC.

Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Revenue
Rental income $ 192,850 $ 193,997 $ 386,799 $ 386,534
Income from direct financing leases 497 15,462 1,110 31,108
Mortgage interest income 16,834 16,297 33,413 32,253
Other investment income 9,097 7,278 17,624 14,192
Miscellaneous income 603 2,763 1,134 3,454
Total operating revenues 219,881 235,797 440,080 467,541

Expenses
Depreciation and amortization 69,609 70,350 139,970 140,343
General and administrative 15,237 11,541 31,712 24,065
Acquisition costs - 19 - (22 )
(Recovery) impairment on real estate properties (1,097 ) 10,135 3,817 17,773
Provision for uncollectible accounts 564 2,673 8,378 5,077
Total operating expenses 84,313 94,718 183,877 187,236

Income before other income and expense 135,568 141,079 256,203 280,305
Other income (expense)
Interest income and other - net 1,125 254 1,710 258
Interest expense (48,082 ) (48,085 ) (96,093 ) (93,126 )
Interest – amortization of deferred financing costs (2,242 ) (2,543 ) (4,485 ) (5,045 )
Interest – refinancing costs - (21,965 ) - (21,965 )
Contractual settlement - - - 10,412
Realized (loss) gain on foreign exchange (66 ) 79 (7 ) 140
Total other expense (49,265 ) (72,260 ) (98,875 ) (109,326 )

Income before (loss) gain on assets sold 86,303 68,819 157,328 170,979
(Loss) gain on assets sold – net (2,891 ) (622 ) 14,609 6,798
Income from continuing operations 83,412 68,197 171,937 177,777
Income tax expense (838 ) (591 ) (1,381 ) (1,691 )
(Loss) income from unconsolidated joint venture (588 ) 551 (637 ) 1,183
Net income 81,986 68,157 169,919 177,269
Net income attributable to noncontrolling interest (3,450 ) (2,900 ) (7,163 ) (7,572 )
Net income available to common stockholders $ 78,536 $ 65,257 $ 162,756 $ 169,697

Earnings per common share available to common stockholders:
Basic:
Net income available to common stockholders $ 0.39 $ 0.33 $ 0.82 $ 0.86
Diluted:
Net income $ 0.39 $ 0.33 $ 0.82 $ 0.86

Dividends declared per common share $ 0.66 $ 0.63 $ 1.32 $ 1.25

Weighted-average shares outstanding, basic 199,497 197,433 199,204 197,223
Weighted-average shares outstanding, diluted 208,460 206,672 208,139 206,423

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Unaudited

(in thousands, except per share amounts)


	Common		Additional		Cumulative				Other		Total
	Stock		Paid-in		Net		Cumulative		Comprehensive		Stockholders’		Noncontrolling		Total
	Par Value		Capital		Earnings		Dividends		Loss		Equity		Interest		Equity
Balance at December 31, 2017 (198,309 common shares & 8,772 Omega OP Units)	$	19,831	$	4,936,302	$	1,839,356	$	(3,210,248)	$	(30,150)	$	3,555,091	$	333,167	$	3,888,258
Cumulative effect of accounting change		—		—		9,577		—		—		9,577		423		10,000
Balance at January 1, 2018 (198,309 common shares & 8,772 Omega OP Units)		19,831		4,936,302		1,848,933		(3,210,248)		(30,150)		3,564,668		333,590		3,898,258
Stock-based compensation expense		—		4,056		—		—		—		4,056		—		4,056
Vesting/exercising of equity compensation plan, net of tax withholdings (89 shares)		9		(1,663)		—		—		—		(1,654)		—		(1,654)
Dividend reinvestment and stock purchase plan (189 shares at an average of $25.87 per share)		19		4,867		—		—		—		4,886		—		4,886
Deferred compensation directors (8 shares at $27.43 per share)		—		67		—		—		—		67		—		67
Equity Shelf Program		—		(29)		—		—		—		(29)		—		(29)
Common dividends declared ($0.66 per share)		—		—		—		(131,517)		—		(131,517)		—		(131,517)
Redemption of Omega OP Units (3 units at $27.06 per share)		—		—		—		—		—		—		(72)		(72)
Omega OP Units distributions		—		—		—		—		—		—		(5,885)		(5,885)
Comprehensive income:
Foreign currency translation		—		—		—		—		9,452		9,452		417		9,869
Cash flow hedges		—		—		—		—		4,299		4,299		189		4,488
Net income		—		—		84,220		—		—		84,220		3,713		87,933
Total comprehensive income																102,290
Balance at March 31, 2018 (198,595 shares & 8,769 Omega OP Units)		19,859		4,943,600		1,933,153		(3,341,765)		(16,399)		3,538,448		331,952		3,870,400
Grant of restricted stock to company directors (38 shares at $30.36 per share)		4		(4)		—		—		—		—		—		—
Stock-based compensation expense		—		4,089		—		—		—		4,089		—		4,089
Dividend reinvestment and stock purchase plan (759 shares at an average of $29.22 per share)		76		22,088		—		—		—		22,164		—		22,164
Deferred compensation directors (27 shares at $31.33 per share)		3		67		—		—		—		70		—		70
Equity Shelf Program (912 shares at $30.19 per share, net of issuance costs)		91		27,447		—		—		—		27,538		—		27,538
Common dividends declared ($0.66 per share)		—		—		—		(131,641)		—		(131,641)		—		(131,641)
Conversion and redemption of Omega OP Units to common stock (1 share at $31.26 per share)		—		42		—		—		—		42		(42)		—
Redemption of Omega OP Units (2 units at $28.91 per share)		—		—		—		—		—		—		(46)		(46)
Omega OP Units distributions		—		—		—		—		—		—		(5,880)		(5,880)
Comprehensive income:
Foreign currency translation		—		—		—		—		(15,471)		(15,471)		(682)		(16,153)
Cash flow hedges		—		—		—		—		1,713		1,713		75		1,788
Net income		—		—		78,536		—		—		78,536		3,450		81,986
Total comprehensive income																67,621
Balance at June 30, 2018 (200,332 shares & 8,766 Omega OP Units)	$	20,033	$	4,997,329	$	2,011,689	$	(3,473,406)	$	(30,157)	$	3,525,488	$	328,827	$	3,854,315

See notes to consolidated financial statements.

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OMEGA HEALTHCARE INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited (in thousands)


	Six Months Ended
	June 30,
	2019		2018
Cash flows from operating activities
Net income	$	147,853	$	169,919
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		144,489		139,970
Impairment on real estate properties		7,561		8,992
Impairment on direct financing leases		7,700		—
Provision for uncollectible accounts		—		8,378
Provision for rental income		7,959		—
Interest - amortization of deferred financing costs		4,476		4,485
Accretion of direct financing leases		9		67
Stock-based compensation expense		8,598		8,145
Loss (gain) on assets sold – net		264		(14,609)
Amortization of acquired in-place leases – net		(3,386)		(5,277)
Effective yield receivable on mortgage notes		(343)		(710)
Interest paid-in-kind		(3,203)		(3,493)
Change in operating assets and liabilities – net:
Contractual receivables		1,588		1,563
Straight-line rent receivables		(24,082)		(30,746)
Lease inducements		(15,494)		(31,551)
Other operating assets and liabilities		(18,577)		(37,967)
Net cash provided by operating activities		265,412		217,166
Cash flows from investing activities
Acquisition of a business, net of cash acquired		(59,616)		—
Acquisition of real estate		(6,397)		(52,744)
Acquisition deposit		(24,532)		—
Net proceeds from sale of real estate investments		9,048		221,952
Investments in construction in progress		(75,026)		(63,313)
Proceeds from sale of direct financing lease and related trust		88,730		15,433
Placement of mortgage loans		(9,670)		(56,944)
Collection of mortgage principal		42,525		25,176
Distributions from unconsolidated joint ventures in excess of earnings		2,089		3,739
Capital improvements to real estate investments		(24,604)		(19,183)
Receipts from insurance proceeds		5,834		6,901
Investments in other investments		(13,729)		(192,962)
Proceeds from other investments		50,336		105,695
Net cash used in investing activities		(15,012)		(6,250)
Cash flows from financing activities
Proceeds from credit facility borrowings		681,000		549,000
Payments on credit facility borrowings		(779,100)		(619,000)
Receipts of other long-term borrowings		2,275		—
Payments of other long-term borrowings		—		(2,049)
Payments of financing related costs		—		(8)
Receipts from dividend reinvestment plan		54,103		27,050
Payments for exercised options and restricted stock		(3,195)		(1,654)
Net proceeds from issuance of common stock		102,869		27,509
Dividends paid		(273,811)		(263,021)
Noncontrolling members' contributions to consolidated joint venture		228		—
Redemption of Omega OP Units		—		(118)
Distributions to Omega OP Unit Holders		(12,133)		(11,765)
Net cash used in financing activities		(227,764)		(294,056)
Effect of foreign currency translation on cash, cash equivalents and restricted cash		(169)		(119)
Increase (decrease) in cash, cash equivalents and restricted cash		22,467		(83,259)
Cash, cash equivalents and restricted cash at beginning of period		11,671		96,808
Cash, cash equivalents and restricted cash at end of period	$	34,138	$	13,549

See notes to consolidated financial ~~statements.~~statements.

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OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

~~OMEGA~~


	June 30,		December 31,
	2019		2018
	(Unaudited)
ASSETS
Real estate properties
Real estate investments	$	8,373,540	$	7,746,410
Less accumulated depreciation		(1,689,438)		(1,562,619)
Real estate investments – net		6,684,102		6,183,791
Investments in direct financing leases – net		11,709		132,262
Mortgage notes receivable – net		774,327		710,858
		7,470,138		7,026,911
Other investments		367,233		504,626
Investments in unconsolidated joint ventures		102,838		31,045
Assets held for sale – net		4,606		989
Total investments		7,944,815		7,563,571

Cash and cash equivalents		32,766		10,300
Restricted cash		1,372		1,371
Contractual receivables – net		25,903		33,826
Other receivables and lease inducements		342,030		313,551
Goodwill		643,875		643,950
Other assets		107,659		24,308
Total assets	$	9,098,420	$	8,590,877

LIABILITIES AND OWNERS’ EQUITY
Term loan – net	$	99,619	$	99,553
Accrued expenses and other liabilities		237,858		211,277
Deferred income taxes		12,827		13,599
Intercompany loans payable		4,695,610		4,501,964
Total liabilities		5,045,914		4,826,393

Owners’ Equity:
General partners’ equity		3,802,971		3,444,441
Limited partners’ equity		249,307		320,043
Total owners’ equity		4,052,278		3,764,484
Noncontrolling interest		228		—
Total equity		4,052,506		3,764,484
Total liabilities and equity	$	9,098,420	$	8,590,877

See notes to consolidated financial statements.

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OHI HEALTHCARE ~~INVESTORS, INC.~~PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(in thousands, except per share amounts)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenue
Rental income	$	194,817	$	192,850	$	386,994	$	386,799
Income from direct financing leases		259		497		519		1,110
Mortgage interest income		18,832		16,834		36,966		33,413
Other investment income		11,133		9,097		23,047		17,624
Miscellaneous income		238		603		1,441		1,134
Total operating revenues		225,279		219,881		448,967		440,080

Expenses
Depreciation and amortization		73,637		69,609		144,489		139,970
General and administrative		13,875		15,237		30,008		31,712
Real estate taxes		4,030		—		7,912		—
Acquisition costs		1,236		—		4,185		—
Impairment (recovery) on real estate properties		5,709		(1,097)		5,709		3,817
Impairment on direct financing leases		—		—		7,700		—
Provision for uncollectible accounts		—		564		—		8,378
Total operating expenses		98,487		84,313		200,003		183,877

Other operating (loss) income
(Loss) gain on assets sold – net		(267)		(2,891)		(264)		14,609
Operating income		126,525		132,677		248,700		270,812

Other income (expense)
Interest income and other – net		(191)		1,125		146		1,710
Interest expense		(48,380)		(48,082)		(96,480)		(96,093)
Interest – amortization of deferred financing costs		(2,238)		(2,242)		(4,476)		(4,485)
Realized loss on foreign exchange		(195)		(66)		(169)		(7)
Total other expense		(51,004)		(49,265)		(100,979)		(98,875)

Income from continuing operations		75,521		83,412		147,721		171,937
Income tax expense		(793)		(838)		(1,468)		(1,381)
Income (loss) from unconsolidated joint ventures		943		(588)		1,600		(637)
Net income	$	75,671	$	81,986	$	147,853	$	169,919

Earnings per unit:
Basic:
Net income	$	0.35	$	0.39	$	0.69	$	0.82
Diluted:
Net income	$	0.34	$	0.39	$	0.68	$	0.82

Weighted-average Omega OP Units outstanding, basic		218,887		208,263		215,362		207,972
Weighted-average Omega OP Units outstanding, diluted		220,479		208,460		217,002		208,139

See notes to consolidated financial statements.

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OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

(in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net income	$	75,671	$	81,986	$	147,853	$	169,919
Other comprehensive (loss) income:
Foreign currency translation		(5,766)		(16,153)		(1,291)		(6,284)
Cash flow hedges		(5,384)		1,788		(8,087)		6,276
Total other comprehensive loss		(11,150)		(14,365)		(9,378)		(8)
Comprehensive income	$	64,521	$	67,621	$	138,475	$	169,911

Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Net income $ 81,986 $ 68,157 $ 169,919 $ 177,269
Other comprehensive (loss) income:
Foreign currency translation (16,153 ) 10,274 (6,284 ) 14,608
Cash flow hedges 1,788 (3,407 ) 6,276 (2,153 )
Total other comprehensive (loss) income (14,365 ) 6,867 (8 ) 12,455
Comprehensive income 67,621 75,024 169,911 189,724
Comprehensive income attributable to noncontrolling interest (2,843 ) (3,192 ) (7,162 ) (8,103 )
Comprehensive income attributable to common stockholders $ 64,778 $ 71,832 $ 162,749 $ 181,621

See notes to consolidated financial ~~statements.~~statements.

Table of Contents

OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP

~~OMEGA HEALTHCARE INVESTORS, INC.~~

CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CHANGES IN OWNERS’ EQUITY

Unaudited

(in ~~thousands, except per share amounts)~~thousands)


	General		Limited
	Partners’		Partners’		Total		General		Limited
	Omega		Omega		Omega		Partners’		Partners’		Total Owners'		Noncontrolling		Total
	OP Units		OP Units		OP Units		Equity		Equity		Equity		Interest		Equity
Balance at December 31, 2018		202,346		8,714		211,060	$	3,444,441	$	320,043	$	3,764,484	$	—	$	3,764,484
Contributions from partners		4,655		—		4,655		166,933		—		166,933		—		166,933
Distributions to partners		—		—		—		(136,687)		(7,013)		(143,700)		—		(143,700)
Noncontrolling interest - consolidated joint venture		—		—		—		—		—		—		228		228
Vesting/exercising of Omega OP Units		—		9		9		(298)		298		—		—		—
Omega OP Unit conversions		—		(1,446)		(1,446)		—		(56,257)		(56,257)		—		(56,257)
Comprehensive income
Foreign currency translation		—		—		—		4,321		154		4,475		—		4,475
Cash flow hedges		—		—		—		(2,610)		(93)		(2,703)		—		(2,703)
Net income		—		—		—		69,702		2,480		72,182		—		72,182
Total comprehensive income																73,954
Balance at March 31, 2019		207,001		7,277		214,278		3,545,802		259,612		3,805,414		228		3,805,642
Cumulative effect of accounting change		—		—		—		(8,198)		(292)		(8,490)		—		(8,490)
Balance at April 1, 2019		207,001		7,277		214,278		3,537,604		259,320		3,796,924		228		3,797,152
Contributions from partners		9,088		—		9,088		342,338		—		342,338		—		342,338
Distributions to partners		—		—		—		(137,232)		(5,120)		(142,352)		—		(142,352)
Vesting/exercising of Omega OP Units		—		54		54		(2,102)		2,102		—		—		—
Omega OP Unit conversions		—		(251)		(251)		—		(9,153)		(9,153)		—		(9,153)
Comprehensive income
Foreign currency translation		—		—		—		(5,573)		(193)		(5,766)		—		(5,766)
Cash flow hedges		—		—		—		(5,205)		(179)		(5,384)		—		(5,384)
Net income		—		—		—		73,141		2,530		75,671		—		75,671
Total comprehensive income																64,521
Balance at June 30, 2019		216,089		7,080		223,169	$	3,802,971	$	249,307	$	4,052,278	$	228	$	4,052,506

Accumulated
Common Additional Cumulative Other Total
Stock Paid-in Net Cumulative Comprehensive Stockholders’ Noncontrolling Total
Par Value Capital Earnings Dividends Loss Equity Interest Equity
Balance at December 31, 2017 (198,309 common shares & 8,772 Omega OP Units) $ 19,831 $ 4,936,302 $ 1,839,356 $ (3,210,248 ) $ (30,150 ) $ 3,555,091 $ 333,167 $ 3,888,258
Cumulative effect of accounting change (see Note 1) - - 9,577 - - 9,577 423 10,000
Balance at January 1, 2018 (198,309 common shares & 8,772 Omega OP Units) 19,831 4,936,302 1,848,933 (3,210,248 ) (30,150 ) 3,564,668 333,590 3,898,258
Grant of restricted stock to company directors (38 shares at $30.36 per share) 4 (4 ) - - - - - -
Stock-based compensation expense - 8,145 - - - 8,145 - 8,145
Vesting/exercising of equity compensation plan, net of tax withholdings (89 shares) 9 (1,663 ) - - - (1,654 ) - (1,654 )
Dividend reinvestment and stock purchase plan (948 shares at an average of $28.55 per share) 95 26,955 - - - 27,050 - 27,050
Deferred compensation directors (35 shares at $30.42 per share) 3 134 - - - 137 - 137
Equity Shelf Program (912 shares at $30.16 per share, net of issuance costs) 91 27,418 - - - 27,509 - 27,509
Common dividends declared ($1.32 per share) - - - (263,158 ) - (263,158 ) - (263,158 )
Conversion of Omega OP Units to common stock (1 share at $31.26 per share) - 42 - - - 42 - 42
Redemption of Omega OP Units (6 units at $28.06 per share) - - - - - - (160 ) (160 )
Omega OP Units distributions - - - - - - (11,765 ) (11,765 )
Comprehensive income:
Foreign currency translation - - - - (6,019 ) (6,019 ) (265 ) (6,284 )
Cash flow hedges - - - - 6,012 6,012 264 6,276
Net income - - 162,756 - - 162,756 7,163 169,919
Total comprehensive income 169,911
Balance at June 30, 2018 (200,332 shares & 8,766 Omega OP Units) $ 20,033 $ 4,997,329 $ 2,011,689 $ (3,473,406 ) $ (30,157 ) $ 3,525,488 $ 328,827 $ 3,854,315

Table of Contents

OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS’ EQUITY

Unaudited

(in thousands)


	General		Limited
	Partners’		Partners’		Total		General		Limited
	Omega		Omega		Omega		Partners’		Partners’		Total
	OP Units		OP Units		OP Units		Equity		Equity		Equity
Balance at December 31, 2017		198,309		8,772		207,081	$	3,555,091	$	333,167	$	3,888,258
Cumulative effect of accounting change		—		—		—		9,577		423		10,000
Balance at January 1, 2018		198,309		8,772		207,081		3,564,668		333,590		3,898,258
Contributions from partners		286		—		286		7,326		—		7,326
Distributions to partners		—		—		—		(131,517)		(5,885)		(137,402)
Omega OP Unit redemptions		—		(3)		(3)		—		(72)		(72)
Comprehensive income
Foreign currency translation		—		—		—		9,452		417		9,869
Cash flow hedges		—		—		—		4,299		189		4,488
Net income		—		—		—		84,220		3,713		87,933
Total comprehensive income												102,290
Balance at March 31, 2018		198,595		8,769		207,364		3,538,448		331,952		3,870,400
Contributions from partners		1,737		—		1,737		53,903		—		53,903
Distributions to partners		—		—		—		(131,641)		(5,880)		(137,521)
Omega OP Unit redemptions		—		(3)		(3)		—		(88)		(88)
Comprehensive income
Foreign currency translation		—		—		—		(15,471)		(682)		(16,153)
Cash flow hedges		—		—		—		1,713		75		1,788
Net income		—		—		—		78,536		3,450		81,986
Total comprehensive income												67,621
Balance at June 30, 2018		200,332		8,766		209,098	$	3,525,488	$	328,827	$	3,854,315

See notes to consolidated financial ~~statements.~~statements.

Table of Contents

OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP

~~OMEGA HEALTHCARE INVESTORS, INC.~~

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited (in thousands)


	Six Months Ended
	June 30,
	2019		2018
Cash flows from operating activities
Net income	$	147,853	$	169,919
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		144,489		139,970
Impairment on real estate properties		7,561		8,992
Impairment loss on direct financing leases		7,700		—
Provision for uncollectible accounts		—		8,378
Provision for rental income		7,959		—
Interest - amortization of deferred financing costs		4,476		4,485
Accretion of direct financing leases		9		67
Stock-based compensation expense		8,598		8,145
Loss (gain) on assets sold – net		264		(14,609)
Amortization of acquired in-place leases – net		(3,386)		(5,277)
Effective yield receivable on mortgage notes		(343)		(710)
Interest paid-in-kind		(3,203)		(3,493)
Change in operating assets and liabilities – net:
Contractual receivables		1,588		1,563
Straight-line rent receivables		(24,082)		(30,746)
Lease inducements		(15,494)		(31,551)
Other operating assets and liabilities		(18,577)		(37,967)
Net cash provided by operating activities		265,412		217,166
Cash flows from investing activities
Acquisition of a business, net of cash acquired		(59,616)		—
Acquisition of real estate		(6,397)		(52,744)
Acquisition deposit		(24,532)		—
Net proceeds from sale of real estate investments		9,048		221,952
Investments in construction in progress		(75,026)		(63,313)
Proceeds from direct financing lease and related trust		88,730		15,433
Placement of mortgage loans		(9,670)		(56,944)
Collection of mortgage principal		42,525		25,176
Distributions from unconsolidated joint ventures in excess of earnings		2,089		3,739
Capital improvements to real estate investments		(24,604)		(19,183)
Receipts from insurance proceeds		5,834		6,901
Investments in other investments		(13,729)		(192,962)
Proceeds from other investments		50,336		105,695
Net cash used in investing activities		(15,012)		(6,250)
Cash flows from financing activities
Proceeds from intercompany loans payable to Omega		683,275		549,000
Repayment of intercompany loans payable to Omega		(779,100)		(621,049)
Payment of financing related costs incurred by Omega		—		(8)
Noncontrolling members' contributions to consolidated joint venture		228		—
Equity contributions from general partners		153,777		52,905
Distributions to general partners		(273,811)		(263,021)
Distributions to limited partners		(12,133)		(11,765)
Redemption of Omega OP Units		—		(118)
Net cash used in financing activities		(227,764)		(294,056)
Effect of foreign currency translation on cash, cash equivalents and restricted cash		(169)		(119)
Increase (decrease) in cash, cash equivalents and restricted cash		22,467		(83,259)
Cash, cash equivalents and restricted cash at beginning of period		11,671		96,808
Cash, cash equivalents and restricted cash at end of period	$	34,138	$	13,549

Six Months Ended
June 30,
2018 2017
Cash flows from operating activities
Net income $ 169,919 $ 177,269
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 139,970 140,343
Impairment on real estate properties 8,992 17,773
Provision for uncollectible accounts 8,378 5,077
Interest - amortization of deferred financing costs 4,485 15,240
Accretion of direct financing leases 67 (6,164 )
Stock-based compensation expense 8,145 7,478
Gain on assets sold – net (14,609 ) (6,798 )
Amortization of acquired in-place leases - net (5,277 ) (6,202 )
Effective yield receivable on mortgage notes (710 ) (1,191 )
Interest paid-in-kind (3,493 ) -
Change in operating assets and liabilities – net:
Contractual receivables 1,563 (33,293 )
Straight-line rent receivables (30,746 ) (23,174 )
Lease inducements (31,551 ) 895
Other operating assets and liabilities (37,967 ) (23,053 )
Net cash provided by operating activities 217,166 264,200
Cash flows from investing activities
Acquisition of real estate (52,744 ) (130,977 )
Cash acquired - 2,341
Investments in construction in progress (63,313 ) (46,108 )
Investments in direct financing leases - (4,767 )
Proceeds from sale of direct financing lease 15,433 27,253
Placement of mortgage loans (56,944 ) (24,978 )
Distributions from unconsolidated joint venture 3,739 9,741
Net proceeds from sale of real estate investments 221,952 64,061
Capital improvements to real estate investments (19,183 ) (16,861 )
Receipts from insurance proceeds 6,901 -
Proceeds from other investments 105,695 35,997
Investments in other investments (192,962 ) (52,228 )
Collection of mortgage principal 25,176 673
Net cash used in investing activities (6,250 ) (135,853 )
Cash flows from financing activities
Proceeds from credit facility borrowings 549,000 817,000
Payments on credit facility borrowings (619,000 ) (852,000 )
Receipts of other long-term borrowings - 1,346,749
Payments of other long-term borrowings (2,049 ) (1,252,139 )
Payments of financing related costs (8 ) (28,483 )
Receipts from dividend reinvestment plan 27,050 19,721
Payments for exercised options and restricted stock (1,654 ) (2,120 )
Net proceeds from issuance of common stock 27,509 6,634
Dividends paid (263,021 ) (246,722 )
Redemption of Omega OP Units (118 ) (48 )
Distributions to Omega OP Unit Holders (11,765 ) (11,143 )
Net cash used in financing activities (294,056 ) (202,551 )
Effect of foreign currency translation on cash, cash equivalents and restricted cash (119 ) 162
Decrease in cash, cash equivalents and restricted cash (83,259 ) (74,042 )
Cash, cash equivalents and restricted cash at beginning of period 96,808 107,276
Cash, cash equivalents and restricted cash at end of period $ 13,549 $ 33,234

See notes to consolidated financial ~~statements.~~statements.

Table of Contents

~~OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP~~

~~CONSOLIDATED BALANCE SHEETS~~

~~(in thousands, except per share amounts~~)

June 30, December 31,
2018 2017
(Unaudited)
ASSETS
Real estate properties
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
Investments in direct financing leases – net 349,465 364,965
Mortgage notes receivable – net 703,309 671,232
7,148,972 7,315,329
Other investments – net 377,206 276,342
Investment in unconsolidated joint venture 32,820 36,516
Assets held for sale – net 3,782 86,699
Total investments 7,562,780 7,714,886

Cash and cash equivalents 10,951 85,937
Restricted cash 2,598 10,871
Accounts receivable – net 320,140 279,334
Goodwill 644,369 644,690
Other assets 33,301 37,587
Total assets $ 8,574,139 $ 8,773,305

LIABILITIES AND OWNERS’ EQUITY
Term loan – net $ 99,488 $ 99,423
Secured borrowings – net - 53,098
Accrued expenses and other liabilities 195,463 226,028
Deferred income taxes 14,718 17,747
Intercompany loans payable 4,410,155 4,488,751
Total liabilities 4,719,824 4,885,047

Owners’ Equity:
General partners’ equity 3,525,488 3,555,091
Limited partners’ equity 328,827 333,167
Total owners’ equity 3,854,315 3,888,258
Total liabilities and owners’ equity $ 8,574,139 $ 8,773,305

~~See notes to consolidated financial statements.~~

~~OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~Unaudited~~

~~(in thousands, except per share amounts)~~

Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Revenue
Rental income $ 192,850 $ 193,997 $ 386,799 $ 386,534
Income from direct financing leases 497 15,462 1,110 31,108
Mortgage interest income 16,834 16,297 33,413 32,253
Other investment income 9,097 7,278 17,624 14,192
Miscellaneous income 603 2,763 1,134 3,454
Total operating revenues 219,881 235,797 440,080 467,541

Expenses
Depreciation and amortization 69,609 70,350 139,970 140,343
General and administrative 15,237 11,541 31,712 24,065
Acquisition costs - 19 - (22 )
(Recovery) impairment loss on real estate properties (1,097 ) 10,135 3,817 17,773
Provision for uncollectible accounts 564 2,673 8,378 5,077
Total operating expenses 84,313 94,718 183,877 187,236

Income before other income and expense 135,568 141,079 256,203 280,305
Other income (expense)
Interest income and other - net 1,125 254 1,710 258
Interest expense (48,082 ) (48,085 ) (96,093 ) (93,126 )
Interest – amortization of deferred financing costs (2,242 ) (2,543 ) (4,485 ) (5,045 )
Interest – refinancing costs - (21,965 ) - (21,965 )
Contractual settlement - - - 10,412
Realized (loss) gain on foreign exchange (66 ) 79 (7 ) 140
Total other expense (49,265 ) (72,260 ) (98,875 ) (109,326 )

Income before (loss) gain on assets sold 86,303 68,819 157,328 170,979
(Loss) gain on assets sold – net (2,891 ) (622 ) 14,609 6,798
Income from continuing operations 83,412 68,197 171,937 177,777
Income tax expense (838 ) (591 ) (1,381 ) (1,691 )
(Loss) income from unconsolidated joint venture (588 ) 551 (637 ) 1,183
Net income $ 81,986 $ 68,157 $ 169,919 $ 177,269

Earnings per unit:
Basic:
Net income $ 0.39 $ 0.33 $ 0.82 $ 0.86
Diluted:
Net income $ 0.39 $ 0.33 $ 0.82 $ 0.86

Dividends declared per Omega OP Unit $ 0.66 $ 0.63 $ 1.32 $ 1.25

Weighted-average Omega OP Units outstanding, basic 208,263 206,205 207,972 206,016
Weighted-average Omega OP Units outstanding, diluted 208,460 206,672 208,139 206,423

~~See notes to consolidated financial statements.~~

~~OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~Unaudited~~

~~(in thousands)~~

Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Net income $ 81,986 $ 68,157 $ 169,919 $ 177,269
Other comprehensive income (loss):
Foreign currency translation (16,153 ) 10,274 (6,284 ) 14,608
Cash flow hedges 1,788 (3,407 ) 6,276 (2,153 )
Total other comprehensive (loss) income (14,365 ) 6,867 (8 ) 12,455
Comprehensive income $ 67,621 $ 75,024 $ 169,911 $ 189,724

~~See notes to consolidated financial statements.~~

~~OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP~~

~~CONSOLIDATED STATEMENT OF CHANGES IN OWNERS’ EQUITY~~

~~Unaudited~~

~~(in thousands)~~

General Limited
Partners’ Partners’ Total General Limited Total
Omega Omega Omega Partners’ Partners’ Owners’
OP Units OP Units OP Units Equity Equity Equity
Balance at December 31, 2017 198,309 8,772 207,081 $ 3,555,091 $ 333,167 $ 3,888,258
Cumulative effect of accounting change (see Note 1) - - - 9,577 423 10,000
Balance at January 1, 2018 198,309 8,772 207,081 3,564,668 333,590 3,898,258
Contributions from partners 2,023 - 2,023 61,229 - 61,229
Distributions to partners - - - (263,158 ) (11,765 ) (274,923 )
Omega OP Unit redemptions - (6 ) (6 ) - (160 ) (160 )
Comprehensive income
Foreign currency translation - - - (6,019 ) (265 ) (6,284 )
Cash flow hedges - - - 6,012 264 6,276
Net income - - - 162,756 7,163 169,919
Total comprehensive income 169,911
Balance at June 30, 2018 200,332 8,766 209,098 $ 3,525,488 $ 328,827 $ 3,854,315

~~See notes to consolidated financial statements.~~

~~OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~Unaudited (in thousands)~~

Six Months Ended
June 30,
2018 2017
Cash flows from operating activities
Net income $ 169,919 $ 177,269
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 139,970 140,343
Impairment on real estate properties 8,992 17,773
Provision for uncollectible accounts 8,378 5,077
Interest - amortization of deferred financing costs 4,485 15,240
Accretion of direct financing leases 67 (6,164 )
Stock-based compensation expense 8,145 7,478
Gain on assets sold – net (14,609 ) (6,798 )
Amortization of acquired in-place leases - net (5,277 ) (6,202 )
Effective yield receivable on mortgage notes (710 ) (1,191 )
Interest paid-in-kind (3,493 ) -
Change in operating assets and liabilities – net:
Contractual receivables 1,563 (33,293 )
Straight-line rent receivables (30,746 ) (23,174 )
Lease inducements (31,551 ) 895
Other operating assets and liabilities (37,967 ) (23,053 )
Net cash provided by operating activities 217,166 264,200
Cash flows from investing activities
Acquisition of real estate (52,744 ) (130,977 )
Cash acquired - 2,341
Investments in construction in progress (63,313 ) (46,108 )
Investments in direct financing leases - (4,767 )
Proceeds from sale of direct financing lease 15,433 27,253
Placement of mortgage loans (56,944 ) (24,978 )
Distributions from unconsolidated joint venture 3,739 9,741
Proceeds from sale of real estate investments 221,952 64,061
Capital improvements to real estate investments (19,183 ) (16,861 )
Receipts from insurance proceeds 6,901 -
Proceeds from other investments 105,695 35,997
Investments in other investments (192,962 ) (52,228 )
Collection of mortgage principal 25,176 673
Net cash used in investing activities (6,250 ) (135,853 )
Cash flows from financing activities
Proceeds from intercompany loans payable to Omega 549,000 2,163,749
Repayment of intercompany loans payable to Omega (621,049 ) (2,104,139 )
Payment of financing related costs incurred by Omega (8 ) (28,483 )
Equity contributions from general partners 52,905 24,235
Distributions to general partners (263,021 ) (246,722 )
Distributions to limited partners (11,765 ) (11,143 )
Redemption of Omega OP Units (118 ) (48 )
Net cash used in financing activities (294,056 ) (202,551 )
Effect of foreign currency translation on cash, cash equivalents and restricted cash (119 ) 162
Decrease in cash, cash equivalents and restricted cash (83,259 ) (74,042 )
Cash, cash equivalents and restricted cash at beginning of period 96,808 107,276
Cash, cash equivalents and restricted cash at end of period $ 13,549 $ 33,234

~~See notes to consolidated financial statements.~~

OMEGA HEALTHCARE INVESTORS, INC. AND OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

June 30, ~~2018~~2019

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~~Omega’s assets are owned directly or indirectly by, and all of ~~Omega's~~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”), and to a lesser extent, independent living facilities, ~~and~~ rehabilitation and acute care ~~facilities.~~facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of long-term leases and mortgage agreements. ~~All~~Except for one MOB, 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~~is derived from fixed and variable rate loans to our operators to fund working capital and capital expenditures. These loans, which ~~are~~may be either unsecured or secured by the collateral of the ~~borrower.~~

borrower, are classified as other investments.

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,~~2019, Omega owned approximately ~~96%~~97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 4%3% of the outstanding Omega OP Units.

On May 17, 2019, Omega and Omega OP completed their merger with MedEquities Realty Trust, Inc. (“MedEquities”) and its subsidiary operating partnership and the general partner of its subsidiary operating partnership. Pursuant to the Agreement and Plan of Merger, as amended by the First Amendment to the Agreement and Plan of Merger, dated March 26, 2019, (the “Merger Agreement”) Omega acquired MedEquities and MedEquities was merged with and into Omega (the “Merger”) at the effective time of the Merger with Omega continuing as the surviving company. At the effective time, each outstanding share of MedEquities common stock was converted into the right to receive (i) 0.235 of a share of Omega common stock, plus cash in lieu of fractional shares and (ii) $2.00 in cash. Pursuant to the Merger Agreement, MedEquities declared a special dividend of $0.21 per share of MedEquities common stock (the “Pre-Closing Dividend”) payable to the holders of record of MedEquities common stock as of the trading day immediately prior to the closing date of the Merger, which dividend was payable following the effective time of the Merger together with the cash consideration under the Merger Agreement. For additional information see Note 2 - Properties and Investments.

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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.~~26, 2019.

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.~~OP and (iii) other entities in which Omega OP has a majority voting interest and control. 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,~~2019, 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. See Note 6 – Variable Interest Entities.

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Real Estate Investments and Depreciation

The costs of significant improvements, renovations and replacements, including interest are capitalized. In addition, we capitalize leasehold improvements when certain criteria are met, including when we supervise construction and will own the improvement. Expenditures for maintenance and repairs are charged to operations as they are incurred.

Depreciation is computed on a straight-line basis over the estimated useful lives ranging from 20 to 40 years for buildings, eight to 15 years for site improvements, and three to ten years for furniture and equipment. Leasehold interests are amortized over the shorter of the estimated useful life or term of the lease.

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~~2019 and ~~2017,~~2018, we recognized impairment (a ~~recovery on) impairment~~recovery) on real estate properties of ~~$(1.1)~~approximately $5.7 million and ~~$10.1~~$(1.1) million, respectively. For the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, we recognized impairment on real estate properties of $5.7 million and $3.8 million, ~~and $17.8 million,~~ respectively. ~~For additional information see Note 2 – Properties and Investments.~~

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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~~2019 and December 31, ~~2017,~~2018, we had ~~$177.1~~$4.9 million and ~~$177.5~~$108.1 million, respectively, of reserves on our loans. For additional information see Note 3 – Direct Financing Leases and Note 4 – Mortgage Notes ~~Receivable and Note 5 – Other Investments.~~

Receivable.

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 factorssuch as asignificant decline in real estate valuations,current macroeconomic conditions, state of the equity and capital markets and our overall financial and operating performanceor 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.

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The noncontrolling interest for Omega represents the outstanding Omega OP Units held by outside ~~investors.~~investors and interests in a consolidated real estate joint venture not fully owned by Omega.

The noncontrolling interest for Omega OP represents outside investors interests in a consolidated real estate joint venture not fully owned by Omega OP.

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.~~

interests, if applicable.

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.~~

interests, if applicable.

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.~~interest, if applicable. 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~~2019, $3.6 million of qualifying cash flow hedges were recorded at fair value in accrued expenses and other liabilities on our Consolidated Balance Sheet. At December 31, ~~2017, $7.7~~2018, $4.0 million ~~and $1.5 million, respectively,~~ of qualifying cash flow hedges were recorded at fair value in other assets on our Consolidated Balance ~~Sheets.~~Sheet.

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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.

Contractual Receivables and Other Receivables and Lease Inducements

~~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.

We assess the probability of collecting substantially all rents under our leases based on several factors, including, among other things, payment history, the financial strength of the lessee and any guarantors, the historical operations and operating trends, the historical payment pattern of the lessee, expected future performance and current economic conditions. If our evaluation of these factors indicates it is probable that we will be unable to collect substantially all rents, we recognize a charge to rental income and limit our rental income to the lesser of lease income on a straight-line basis plus variable rents when they become accruable or cash collected. If we change our conclusion regarding the probability of collecting rent payments required by a lessee, we may recognize an adjustment to rental income in the period we make a change to our prior conclusion.

On a quarterly basis, and more frequently as appropriate, we review our ~~accounts receivable~~interest receivables, effective yield interest receivables and direct financing lease receivables 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,

For a loan recognized on an effective yield basis or ~~the existence of~~a direct financing lease, ~~inducements,~~ we generally provide an allowance for ~~straight-line,~~ effective interest ~~and/~~or ~~lease inducement accounts receivable~~income from direct financing leases when certain conditions or indicators of adverse collectability are present. If ~~the~~these accounts receivable ~~balance is~~balances are subsequently deemed uncollectible, the receivable and allowance for doubtful account balance are written off.

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A summary of our net receivables by type is as follows:


	June 30,		December 31,
	2019		2018
	(in thousands)
Contractual receivables	$	25,903	$	34,901
Allowance		—		(1,075)
Contractual receivables – net	$	25,903	$	33,826

Effective yield interest receivables	$	13,085	$	12,741
Straight-line rent receivables		262,743		251,166
Lease inducements		66,202		49,644
Other receivables and lease inducements	$	342,030	$	313,551

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,~~2019, we wrote-off approximately ~~$7.8~~$1.2 million of straight-line rent receivables to ~~provision for uncollectible accounts,~~rental income as a result of transitioning a facility ~~transitions~~ to ~~other operators.~~

another existing operator.

During the second quarter of ~~2018,~~2019, we ~~placed two~~wrote-off approximately $6.7 million of ~~our~~contractual receivables, straight-line rent receivables and lease inducements to rental income as a result of placing three operators on a cash basis ~~and wrote-off approximately $2.8 million~~resulting from a change in our evaluation of ~~straight-line~~the collectibility of future rent payments due under the respective lease agreements.

Reclassification

Contractual receivables – net, Other 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 expensesinducements, and ~~other liabilities~~Gains on ~~our Consolidated Balance Sheets.~~

~~Reclassification~~

~~Certain prior quarter amounts~~assets sold - net have been reclassified to conform to the current ~~quarter~~period presentation.

Accounting Pronouncements Adopted in ~~2018~~

2019

In ~~2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued ~~ASU 2014-09,~~Accounting Standards Update (“ASU”) 2016-02, ~~Revenue from Contracts with Customers~~Leases (Topic 842) (“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,~~2018-01, ~~Derivatives and Hedging: Targeted~~Leases (Topic 842):Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-10, Leases (Topic 842):Codification Improvements to ~~Accounting~~Topic 842, Leases, ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for ~~Hedging Activities~~Lessors~~(“ASU 2017-12”)~~. ~~The purpose~~These standards are collectively referred to herein as Topic 842 and set out the principles for the recognition, measurement, presentation and disclosure of ~~this updated~~leases for both parties to a contract (i.e., lessees and lessors). Topic 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to the previous guidance ~~is to better align~~for sales type leases, direct financing leases and operating leases. Topic 842 was adopted by us on January 1, 2019 using 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 method. Upon adoption, we applied the package of practical expedients that allowed us to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. Furthermore, we applied the optional transition method, ~~in any interim period after issuance of~~which allowed us to initially apply Topic 842 at the ~~update, or alternatively requires~~ adoption ~~for fiscal years beginning after December 15, 2018. This adoption method will require the Company to~~date and recognize ~~the~~a 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 in the period of adoption, although we did not record an adjustment as of January 1, 2019. During the ~~beginning~~three months ended June 30, 2019, we made an immaterial adjustment to the equity balance as of April 1, 2019 of approximately $8.5 million to reflect our assessment of the ~~fiscal year~~collectability of certain operator’s future contractual lease payments based on the facts and circumstances that ~~an entity adopts the update. On~~existed as of January 1, ~~2018,~~2019. Additionally, our leases met the ~~Company adopted ASU 2017-12 using~~criteria in Topic 842 to not separate non-lease components from the ~~modified retrospective transition method.~~ related lease component. We have elected to exclude sales and other similar taxes from the measurement of lease revenue and expense and we have excluded those costs paid directly by lessees to third parties.

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Upon adoption, we recorded total initial non-cash right of use assets and lease liabilities of approximately $11.1 million. We also began recording variable lease payments as rental income and real estate tax expense for those facilities’ property taxes that we pay directly and are reimbursed by our operators. For the three and six months ended June 30, 2019, we recorded $2.8 million and $6.6 million, respectively, of rental income and $4.0 million and $7.9 million, respectively, of real estate tax expense in our Consolidated Statements of Operations. We also began recording rental income and ground lease expense for those assets we lease and are reimbursed by our operators and/or are paid for directly by our operators. For the three and six months ended June 30, 2019, we recorded $0.2 million and $0.4 million, respectively, of rental income and $0.3 million and $0.5 million, respectively, of ground lease expense in our Consolidated Statements of Operations.

In addition, provisions for operating lease losses are recognized as a direct reduction to rental income. Provisions for operating lease losses prior to January 1, 2019 were recorded in provision for uncollectible accounts on our Consolidated Statements of Operations and were not reclassified to conform to the current period presentation.

Lessee Disclosure

At the inception of the lease and over its term, we evaluate each lease to determine the proper lease classification. Certain of these leases provide us the contractual right to use and economically benefit from all of the space specified in the lease. Therefore, we have determined that they should be evaluated as lease arrangements.

As a ~~result of adopting the standard,~~lessee, the Company is ~~making certain adjustments~~party to ~~its existing hedge designation documentation~~ground and/or facility leases related to 11 SNFs and three offices which are classified as operating leases. Substantially all of our operating leases contain provisions for ~~active hedging relationships~~specified annual increases over the rents of the prior year and are generally computed in ~~order to take advantage~~one of three methods depending on the specific provisions of each lease as follows: (i) a specific annual increase over the prior year’s rent, generally between 1.0% and 3.0%; (ii) an increase based on the change in pre-determined formulas from year to year (e.g., increases in the ~~new guidance~~Consumer Price Index); or (iii) specific dollar increases over prior years. The initial terms of our ground leases range between 10 years and 100 years. Our office leases have initial terms of approximately 10 years. Certain leases have options to ~~fully align~~extend, terminate or purchase the asset and have been considered in our analysis of the lease term and the measurement of the right-of-use assets and lease liabilities. The discount rate utilized in forming the basis of our right of use assets and lease liabilities approximates our cost of debt. We have not recognized a right of use asset and/or lease liability for leases with terms of 12 months or less and without an option to purchase the underlying asset.

On a monthly basis, we remeasure our lease liabilities at the present value of the future lease payments using the discount rate determined at lease commencement. Rental expense from operating leases is generally recognized on a straight-line basis over the lease term.

We do not include in our measurement of our lease liability certain variable payments, including changes in an index until the specific events that trigger the variable payments have occurred.

As a lessee, certain of our operating leases contain non-lease components, such as our proportionate share of common area expenses. We have determined that all of our operating leases qualify for the practical expedient to not separate the lease and non-lease components because (i) the lease components are operating leases and (ii) the timing and pattern of recognition of the non-lease components are the same as the lease components. We apply Topic 842, to the combined component. Lease expense derived from our operating leases is recorded in general and administrative in our Consolidated Statement of Operations.


		As of
	June 30, 2019
	(in thousands)

Other assets - right of use assets	$	17,283

Accrued expenses and other liabilities – lease liabilities	$	17,766

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	For the Three Months Ended		For the Six Months Ended
	June 30, 2019		June 30, 2019
	(in thousands)
Operating lease cost
Lease expense	$	524	$	1,006
Variable lease expense		50		92
Total lease expense	$	574	$	1,098

Rental income – ground lease income	$	214	$	412

Cash paid for amounts included in the measurement of lease liabilities	$	450	$	902
Weighted average remaining lease term (in years)				29
Weighted average discount rate				5.25%

The following amounts reflect the maturities of our operating lease liabilities as of June 30, 2019:


	Future Rental Payments		Accretion of Lease Liability		Total
Remainder of 2019	$	1,095	$	(461)	$	634
2020		2,035		(876)		1,159
2021		1,665		(823)		842
2022		1,828		(774)		1,054
2023		1,761		(717)		1,044
2024		1,607		(666)		941
Thereafter		33,581		(21,489)		12,092
Total	$	43,572	$	(25,806)	$	17,766

Lessor Disclosures

At the inception of the lease and over its ~~documentation~~term, we evaluate each lease to determine the proper lease classification. Certain of these leases provide our operators the contractual right to use and economically benefit from all of the physical space specified in the lease, therefore we have determined that they should be evaluated as lease arrangements.

As lessor, our leased real estate properties, represented by 744 SNFs, 117 ALFs, 28 specialty facilities and two medical office buildings at June 30, 2019, are leased under provisions of single or master operating leases with ~~ASU 2017-12. The adoption~~initial terms typically ranging from 5 to 15 years, plus renewal options. See Note 2 – Properties and Investments. As of ~~ASU 2017-12 did~~June 30, 2019, we have determined that all but two of our leases should be accounted for as operating leases. Two leases are accounted for as direct financing leases. See Note 3 – Direct Financing Leases. Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties.

Substantially all of our operating 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 the specific provisions of each lease as follows: (i) a specific annual 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); or (iii) specific dollar increases over prior years. Rental income from operating leases is generally recognized on a straight-line basis over the lease term when we have determined that the collectibility of substantially all of the lease payments is probable. If we determine that it is not probable that substantially all of the lease payments will be collected, we account for the revenue under the lease on a cash basis. Changes in the assessment of probability are accounted for on a cumulative basis as if the lease had always been accounted for based on the current determination of the likelihood of collection potentially resulting in increased volatility of rental revenue. Some of our leases have options to extend, terminate or purchase the facilities, which are considered when determining the lease term. We do not include in our measurement of our lease receivables certain variable payments, including changes in an index until the specific events that trigger the variable payments have occurred.

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Certain of our operating leases require the operators to reimburse us for property taxes and other expenditures that are not considered components of the lease and therefore no consideration is allocated to them as they do not result in the transfer of a ~~material impact on~~good or service to the operators. We have determined that all of our leases qualify for the practical expedient to not separate the lease and non-lease components because (i) the lease components are operating leases and (ii) the timing and pattern of recognition of the non-lease components are the same as the lease components. We apply Topic 842, to the combined component. Income derived from our leases is recorded in rental income in our Consolidated Statement of Operations.

Certain tenants are obligated to pay directly their obligations under their leases for real estate taxes, insurance and certain other expenses. These obligations, which have been assumed by the tenants under the terms of their respective leases, are not reflected in our consolidated financial statements. To the extent any tenant responsible for these obligations under their respective lease defaults on its lease or if it is deemed probable that the tenant will fail to pay for such costs, we would record a liability for such obligation.


	For the Three Months Ended		For the Six Months Ended
	June 30, 2019		June 30, 2019
	(in thousands)
Interest income – direct financing leases	$	259	$	519

Rental income – operating leases		192,026		380,428
Variable lease income – operating leases		2,791		6,566
Total lease income	$	194,817	$	386,994

Real estate tax expense	$	4,030	$	7,912
General and administrative – ground lease expense		287		524
Total	$	4,317	$	8,436

The following amounts reflecting the estimated contractual rents due to us for the remainder of the initial terms of our operating leases as of June 30, 2019:


	(in thousands)
Remainder of 2019	$	379,614
2020		774,571
2021		809,867
2022		790,891
2023		778,907
2024		785,979
Thereafter		3,944,296
Total	$	8,264,125

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~~)(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 credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for annual and interim periods beginning after December 15, ~~2019 and early adoption is permitted~~2019. ASU 2016-13 specifically excludes from its scope receivables arising from operating leases accounted for ~~annual and interim periods beginning after December 15, 2018.~~under Topic 842. We ~~are~~ currently ~~evaluating~~expect to adopt the standard using the modified retrospective approach. We continue to evaluate the impact of adopting ASU 2016-13 on our consolidated financial statements.

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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~~investments in ~~leased~~ real estate properties subject to operating leases is as follows:


	June 30,		December 31,
	2019		2018
	(in thousands)
Buildings	$	6,570,302	$	6,056,820
Land		836,810		786,174
Furniture, fixtures and equipment		473,959		447,610
Site improvements		264,552		250,917
Construction in progress		227,917		204,889
Total real estate investments		8,373,540		7,746,410
Less accumulated depreciation		(1,689,438)		(1,562,619)
Real estate investments – net	$	6,684,102	$	6,183,791

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~~tables summarized the significant acquisitions that occurred during the first six months of ~~2018:~~2019:

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


	Number of					Total					Building & Site		Furniture		Initial
	Facilities				Country/	Investment			Land		Improvements		& Fixtures		Annual
Period	SNF	ALF	Specialty	MOB	State	(in millions)									Cash Yield⁽¹⁾
Q1	1	—	—	—	OH	$	11.9	⁽³⁾	$	1.1	$	10.1	$	0.7	12.00	%
Q2	20	1	11	1	CA, CT, IN, NV, SC, TN, TX		421.4	⁽²⁾		40.1		368.7		12.6	10.27	%
Q2	7	1	3	—	PA, VA		131.8	⁽³⁾		9.9		112.7		9.2	9.35	%
Total	28	2	14	1		$	565.1		$	51.1	$	491.5	$	22.5

⁽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.

(2)

The acquisition was accounted for as a business combination. The Company estimated the fair value of the assets acquired on the acquisition date based on certain valuation analyses that have yet to be finalized, and accordingly, the assets acquired, as detailed, are subject to adjustment once the analysis is completed. The other acquisitions were accounted for as asset acquisitions.

(3)

Acquired via a deed-in-lieu of foreclosure.

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MedEquities Merger

On May 17, 2019, Omega and Omega OP completed the MedEquities Merger. In accordance with the Merger Agreement, each share of MedEquities common stock issued and outstanding immediately prior thereto was converted into the right to receive (i) 0.235 of a share of Omega common stock plus the right to receive cash in lieu of any fractional shares of Omega common stock, and (ii) an amount in cash equal to $2.00 (the “Cash Consideration”). In connection with the MedEquities Merger, we issued approximately 7.5 million shares of Omega common stock and paid approximately $63.7 million of cash consideration to former MedEquities stockholders. We borrowed approximately $350 million under our existing senior unsecured revolving credit facility to fund the cash consideration and the repayment of MedEquities’ previously outstanding debt. As a result of the MedEquities Merger, we acquired 33 facilities subject to operating leases, four mortgages, three other investments and an investment in an unconsolidated joint venture. We also acquired other assets and assumed debt and other liabilities. Based on the closing price of our common stock on May 16, 2019, the fair value of the consideration exchanged approximated $346 million.

The following table highlights the preliminary fair value of the assets acquired and liabilities assumed on May 17, 2019:


	(in thousands)
Fair value of net assets acquired:
Real estate investments	$	421,448
Mortgage notes receivable (see Note 7)		108,097
Other investments		19,192
Investment in unconsolidated joint venture		73,907
Cash		4,067
Contractual receivables		1,461
Other assets ⁽¹⁾		32,819
Total investments		660,991
Debt		(285,100)
Accrued expenses and other liabilities ⁽²⁾		(30,342)
Fair value of net assets acquired	$	345,549

(1)

Includes approximately $26.8 million in above market lease assets.

(2)

Includes approximately $7.5 million in below market lease liabilities.

The MedEquities facilities acquired in 2019 are included in our results of operations from the date of acquisition. For the period from May 17, 2019 through June 30, 2019, we recognized approximately $7.1 million of total revenue from the assets acquired in connection with the MedEquities Merger.

For the three and six months ended June 30, ~~2018,~~2019, we ~~acquired two parcels~~incurred approximately $1.2 million and $4.2 million, respectively, of ~~land (not reflected in the table above) for approximately $3.5 million~~acquisition related costs associated with the ~~intent~~MedEquities Merger.

Table of ~~building new facilities for our existing operators.~~Contents

Pro Forma Acquisition Results

The following unaudited pro forma results of operations reflect the impact of acquisitions from the second quarter of 2019 as if they occurred on January 1, 2018. In the opinion of management, all significant necessary adjustments to reflect the effect of the acquisitions have been made. The following pro forma information is not indicative of future operations.


	Pro Forma
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019			2018	2019			2018
		(in thousands, except per share amounts, unaudited)

Pro forma revenues	$	232,492	$	234,156	$	470,455	$	468,630
Pro forma net income	$	79,107	$	88,823	$	158,126	$	183,593

Earnings per share – diluted:
Net income – as reported	$	0.34	$	0.39	$	0.68	$	0.82
Net income – pro forma	$	0.35	$	0.41	$	0.71	$	0.85

Asset Sales ~~Impairments~~ and ~~Other~~Impairments

During the first quarter of ~~2018,~~2019, we sold ~~14 facilities (five of~~one facility which ~~were~~was previously held for sale at December 31, ~~2017) subject to operating leases~~2018 for approximately ~~$74.7~~$0.4 million in net cash proceeds recognizing a net gain ~~on sale~~ of approximately ~~$17.5~~$3,000.

During the second quarter of 2019, we sold three facilities subject to operating leases and a parcel of land for approximately $8.6 million in net cash proceeds recognizing a net loss of approximately $0.3 million. In addition, we recorded impairments on real estate properties of approximately ~~$4.9~~$7.6 million on ~~17 facilities (16 of which were subsequently reclassified to assets held for sale).~~

~~During the~~two facilities. Our 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). Our2019 impairments were offset by ~~$5.2~~$1.9 million of insurance proceeds received related to a facility that was destroyed ~~in November 2017.~~by a storm.

~~Of the 45 facilities sold during~~During the second quarter of ~~2018, we sold 12 SNFs on June 1, 2018 (12~~2019, the Company reached an agreement with Diversicare Healthcare Services, Inc. to amend its master lease to terminate operations of ~~which were previously held for sale at March 31, 2018) secured by HUD mortgages~~ten nursing facilities located in Kentucky. We will concurrently sell the facilities to ~~subsidiaries of~~ an ~~existing operator. The Company sold the 12 SNF facilities with carrying values of approximately $62 million~~unrelated third party for approximately ~~$78 million which consisted of $25 million of cash consideration~~$84.5 million. The transaction is subject to closing conditions, including but not limited to, state licensure 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.regulatory approval.

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.~~values. 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~~which generally consist of non-binding offers from unrelated third ~~parties). Also see Note 8 – Assets Held For Sale.~~parties and/or broker quotes.

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NOTE 3 – DIRECT FINANCING LEASES

The components of investments in direct financing leases consist of the following:


	June 30,		December 31,
	2019		2018
	(in thousands)
Minimum lease payments receivable	$	27,748	$	28,294
Less unearned income		(16,039)		(16,577)
Investment in non-Orianna direct financing leases		11,709		11,717
Investment in Orianna direct financing leases		—		223,745
Less allowance for loss on Orianna direct financing leases		—		(103,200)
Investment in direct financing leases – net	$	11,709	$	132,262

Properties subject to direct financing leases		2		17
Number of direct financing leases		2		3

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~~amounts reflect the future cash flows and straight-line rents ~~are due under~~for our direct financing leases ~~for the remainder~~as of ~~2018 and the subsequent five years~~June 30, 2019 (in thousands):


	Contractual Rent		Straight-Line Rent		Total
Remainder of 2019	$	585	$	(523)	$	62
2020		1,170		(981)		189
2021		1,084		(1,029)		55
2022		1,106		(1,023)		83
2023		1,128		(1,014)		114
2024		1,151		(1,003)		148
Thereafter		21,524		(10,466)		11,058
	$	27,748	$	(16,039)	$	11,709

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.~~

Former Orianna Direct Financing Lease

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~~providing for contractual rental payments yielding 10.6% per annum over the term of the leases. The purchase/leaseback transaction ~~is being~~was 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~~of December 31, 2018, we had 15 SNFs subject to a direct financing lease with ~~the~~Orianna with a carrying value of approximately $120.5 million, net of an allowance of $103.2 million.

On January 11, 2019, pursuant to a Bankruptcy Court ~~we entered into~~order, affiliates of Orianna purchased the remaining 15 SNFs for $176 million of consideration, comprised of $146 million in cash received by Orianna and a ~~Restructuring Support Agreement (“RSA”) that was expected to form~~$30.0 million seller note held by the ~~basis for Orianna’s restructuring.~~Company. The ~~RSA provided for~~$30.0 million note bears interest at 6% per annum and matures on January 11, 2026. Interest on the ~~recommencement,~~unpaid principal balance is due quarterly in ~~April 2018, of partial rent~~arrears. Commencing on January 11, 2022, quarterly principal payments ~~at $1.0 million per month and established~~are due based on a ~~specific timeline for~~15-year amortization schedule on the ~~implementation of Orianna’s planned restructuring. The RSA provided for the transition of 23 facilities to new operators and the potential sale~~then outstanding principal balance of the ~~remaining 19 facilities subject to~~loan. On the ~~plan of reorganization as approved by~~same date, Orianna repaid 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.financing, including all related interest. See Note 5 – Other ~~Investments and Note 19 – Subsequent Events.~~Investments.

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On January 16, 2019, the Bankruptcy Court confirmed Orianna’s plan, creating a Distribution Trust (the “Trust”) to distribute the proceeds from Orianna’s sale of the remaining 15 SNFs, as well as the Trust’s collections of Orianna’s accounts receivable portfolio. In January 2019, we reclassified our net investment in direct financing lease of $115.8 million from the Trust to other assets on our Consolidated Balance Sheet. For the period from January 16, 2019 through June 30, 2019, we received approximately $88 million from the Trust as a partial liquidation including approximately $2.0 million during the three months ended June 30, 2019.

In ~~2017,~~March 2019, we received updated information from the Trust indicating diminished collectability of the accounts receivable owed to us. As a result, we recorded an additional $7.7 million allowance ~~for loss on direct financing leases~~during the three months ended March 31, 2019, reducing our remaining receivable from the Trust to approximately $21.1 million as of ~~$172.2~~March 31, 2019. As of June 30, 2019, our remaining receivable from the Trust is $19.1 million. As of June 30, 2019, the Trust was comprised of $20.7 million of cash and accounts receivable, net of an estimated allowance, of $4.2 million. We expect that the aggregate of such amounts will be used to pay estimated costs of $5.8 million to other creditors and to wind down the Trust, with ~~Orianna covering 38 facilities in~~ the ~~Southeast region~~remainder paid to us. The amount payable to us is contingent upon the collection of the ~~U.S. The amount of~~accounts receivable balances and the ~~allowance was determined based on~~estimated costs to wind down the ~~fair value of the facilities~~Trust. These amounts are estimated and remain 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.change. Such changes could be ~~significantly~~ different than the currently estimated ~~fair value~~amounts 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,~~2019, mortgage notes receivable relate to ~~six~~eight fixed rate mortgage notes on ~~53 long-term care~~51 facilities. The mortgage notes are secured by first mortgage liens on the ~~borrowers'~~borrowers’ underlying real estate and personal property. The mortgage notes receivable relate to facilities located in ~~six~~eight states that are operated by ~~five~~eight 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


	June 30,		December 31,
	2019		2018
	(in thousands)
Mortgage note due 2027; interest at 10.39%	$	112,500	$	112,500
Mortgage notes due 2029; interest at 9.87%⁽¹⁾		516,333		537,515
Other mortgage notes outstanding⁽²⁾⁽³⁾		150,399		65,748
Mortgage notes receivable, gross		779,232		715,763
Allowance for loss on mortgage notes receivable⁽⁴⁾		(4,905)		(4,905)
Total mortgages — net	$	774,327	$	710,858

⁽¹⁾

Approximates the weighted average interest rate on ~~39 facilities.~~34 facilities as of June 30, 2019. Two notes totaling approximately ~~$15.2~~$27.7 million are construction mortgages maturing in ~~2018 and 2019.~~2019. The remaining loan balance matures in 2029.

⁽²⁾

Other ~~mortgage notes~~mortgages outstanding have a weighted average interest rate of ~~11.25%~~9.28% per annum as of June 30, 2019 and maturity dates between ~~2018~~2019 and 2028.

⁽³⁾

As disclosed in Note 2 – Properties and Investments, the mortgages acquired in the MedEquities Merger are subject to further adjustment pending completion of the purchase accounting.

(4)

The allowance for loss on mortgage notes receivable relates to one mortgage with an operator. The net carrying value and fair value of the mortgage note receivable is approximately ~~$1.5~~$1.5 million at June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

~~$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%.~~

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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


	June 30,		December 31,
	2019		2018
	(in thousands)
Other investment note due 2019	$	—	$	131,452
Other investment notes due 2021; interest at 13.08% ⁽¹⁾		74,012		71,036
Other investment notes due 2023; interest at 7.32% ⁽¹⁾		65,000		65,000
Other investment note due 2023; interest at 12.00%		57,084		59,454
Other investment notes due 2024-2025; interest at 8.15% ⁽¹⁾		55,787		46,287
Other investment note due 2018-2022		—		40,242
Other investment notes outstanding ^{(2) (3)}		115,350		91,155
Total other investments	$	367,233	$	504,626

(1)

Approximate weighted average interest rate as of June 30, ~~2018.~~2019.

(2)

Other investment notes have a weighted average interest rate of ~~8.55%~~7.85% as of June 30, 2019 and maturity dates through 2028.

(3)

~~The allowance for loss on~~As disclosed in Note 2 – Properties and Investments, the other investments ~~relates~~acquired in the MedEquities Merger are subject to ~~one loan with an operator that was fully reserved at December 31, 2017 and written off during~~further adjustment pending completion of the ~~second quarter of 2018.~~purchase accounting.

Other investment notes due ~~2018 - 2022~~

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~~was 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~~bore interest at 1-month LIBOR plus 5.5% per annum and ~~matures~~matured 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~~bore interest at 1-month LIBOR plus 9.0% per annum and ~~matures~~matured 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,~~December 31, 2018, approximately ~~$10.5~~$14.2 million iswas outstanding on this term loan and $10.8 million was outstanding on this revolving credit facility. ~~On July 23, 2018, we notified~~In January 2019, Orianna ~~that it was in default~~repaid the DIP financing and permanently terminated our commitment under the ~~DIP facility. See Note 19 – Subsequent Events.~~DIP.

In May 2017, we provided Orianna an $18.8 million maximum borrowing secured revolving working capital loan that ~~bears~~bore 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~~was to mature on April 30, 2022. This revolving working capital loan ~~has~~bore a default rate of 5% per annum. As of ~~June 30,~~December 31, 2018, approximately $15.2 million iswas outstanding on this revolving working capital loan. ~~Pursuant to the Bankruptcy Court’s interim order approving the DIP financing,~~In January 2019, Orianna ~~is obligated to pay one-half (1/2) of all accrued post-bankruptcy interest payable on~~settled this secured 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~~2019

~~Simultaneously, with the sale of 12 SNFs to subsidiaries of an existing operator~~On September 28, 2018, we provided a ~~principal~~$131.3 million secured term loan to an unrelated third party. The loan was secured by a collateral assignment of ~~the existing operator a $39.7 million unsecured~~mortgages covering seven SNFs, three independent living facilities and one ALF. The loan ~~bearing~~bore interest at 6%9.35% per annum ~~that matures~~and matured on May 31, ~~2021. Commencing October 1, 2018 and the first day of each subsequent quarter, the~~2019. The loan ~~requires principal~~required monthly interest 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 remainderbalance due at maturity. The ~~discount~~borrower used the proceeds to repay existing indebtedness and pay a one-time distribution to its equity holders. In connection with this loan ~~fee are~~we incurred approximately $0.4 million of origination costs which were deferred and recognized ~~on an effective basis~~ over the term of the loan.

~~Other investment note due 2024-2025~~

On ~~September 30, 2016,~~May 31, 2019, we acquired these facilities located in Pennsylvania (9) and ~~amended~~Virginia (2) via a ~~term loan with a fair value~~deed-in-lieu of ~~approximately $37.0 million with Agemo Holdings LLC (“Agemo”~~foreclosure and subsequently leased the facilities to an ~~entity formed in May 2018 to silo the leases and loans formerly held by Signature Healthcare). A $5.0 million tranche~~existing operator of the ~~term loan that bore interest at 13% per annum was repaid in August 2017. The remaining $32.0 million tranche~~Company.

Table 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.Contents

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, 2019 and December 31, 2018, ~~Orianna and~~ Agemo ~~are VIEs.~~Holdings LLC (“Agemo”; formerly Signature Healthcare) is a VIE. Below is a summary of our assets and ~~liabilities~~collateral associated with ~~each~~this operator as of June 30, 2019 and December 31, 2018:


	June 30,		December 31,
	2019		2018
		(in thousands)
Assets
Real estate investments – net	$	408,983	$	413,396
Other investments		55,787		46,287
Contractual receivables		18,060		18,017
Straight-line rent receivables		40,502		34,203
Lease inducement		4,638		2,362
Above market lease		—		2
Subtotal		527,970		514,267

Collateral
Letters of credit		(9,253)		(9,253)
Personal guarantee		(8,000)		(15,000)
Other collateral		(408,983)		(413,396)
Subtotal		(426,236)		(437,649)

Maximum exposure to loss	$	101,734	$	76,618

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,~~the VIE, we considered the underlying ~~fair~~ value of the real estate subject to leases with ~~these operators~~the operator and other collateral, if any, supporting our other investments, which may include accounts receivable, security deposits, letters of credit or personal guarantees, if any. See Note 5 – Other Investments and Note 16 – Commitments and Contingencies, regarding ~~the terms of other investments with these two operators. The Company has also committed~~our commitment 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.~~operators which includes Agemo.

The table below reflects our total revenues from ~~Orianna and~~ Agemo for the three and six months ended June 30, 2019 and 2018:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019			2018	2019			2018
		(in thousands)
Revenue
Rental income	$	15,558	$	14,860	$	30,329	$	29,711
Other investment income		1,093		828		2,127		1,548
Total⁽¹⁾	$	16,651	$	15,688	$	32,456	$	31,259

(1)

For the three months ended June 30, 2019 and 2018, we received cash rental income and other investment income from Agemo of approximately $13.2 million and $17.6 million, respectively. For the six months ended June 30, 2019 and 2018, we received cash rental income and other investment income from Agemo of approximately $26.2 million and $28.1 million, respectively.

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

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NOTE 7 – ~~INVESTMENT~~INVESTMENTS IN ~~UNCONSOLIDATED~~ JOINT ~~VENTURE~~VENTURES

Consolidated Joint Venture

In February 2019, we entered into a joint venture to construct a 100,000 square foot medical office building in Lakeway, Texas with an estimated initial construction budget of approximately $36 million. The Company owns 90% of the venture with the remaining 10% owned by outside investors. During the first quarter of 2019, this consolidated joint venture acquired a parcel of land for approximately $3.6 million.

Unconsolidated Joint Ventures

Lakeway Partnership

On May 17, 2019, in connection with the MedEquities Merger, we acquired a 51% ownership interest in Lakeway Realty, L.L.C. (the “Lakeway Partnership”), a joint venture that owns the Lakeway Regional Medical Center (the “Lakeway Hospital”). The other 49% interest is owned indirectly by a physicians group and a non-physician investor. The Lakeway Hospital is an acute care hospital located in Lakeway, Texas. The Lakeway Partnership is also a lessor under a ground lease for a medical office building which is part of the Lakeway Hospital campus. On the merger date, the Company’s ownership interest in the Lakeway Partnership had a preliminary fair value of approximately $73.9 million (subject to the completion of our purchase accounting). Our investment in the Lakeway Partnership consists primarily of real estate. We estimated the fair value of the underlying real estate considering the lessees’ purchase option (Level 1) which is discussed in more detail below, third-party appraisals and discounted cash flows associated with the ground lease (Level 3). Our preliminary initial basis difference of approximately $69.9 million is being amortized on a straight-line basis over 40 years to income (loss) from unconsolidated joint ventures in the accompanying Consolidated Statements of Operations. We account for our investment in this joint venture using the equity method. The accounting policies for this unconsolidated joint venture are the same as those of the Company.

The Company also acquired a first mortgage lien issued to Lakeway Partnership in the original principal amount of approximately $73.0 million bearing interest at 8% per annum based on a 25-year amortization schedule and maturing on March 20, 2025. We have preliminarily determined the acquisition date fair value of the acquired mortgage is $69.1 million.

We receive a monthly administrative fee of $5,000 from this joint venture for accounting services which is included in miscellaneous income in the accompanying Consolidated Statements of Operations.

The Lakeway Hospital is leased pursuant to a triple-net lease to Scott & White Hospital – Round Rock (the “Baylor Lessee”), with Baylor University Medical Center (“BUMC”) as guarantor. These entities are part of the Baylor Scott & White Health system. The lease provides that, commencing after completion of the third year of the lease (effective September 1, 2019) and subject to certain conditions, the Baylor Lessee has the option to purchase the Lakeway Hospital at a price equal to the aggregate base rent payable under the lease for the 12-month period following the date of the written notice from the Baylor Lessee to exercise the purchase option divided by (i) 6.5% if written notice is provided after completion of the third lease year and before completion of the tenth lease year or (ii) 7.0% if written notice is provided any time thereafter. In addition, the Baylor Lessee has a right of first refusal and a right of first offer in the event that the joint venture intends to sell or otherwise transfer Lakeway Hospital.

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Second Spring Healthcare Investments

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~~this 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~~Genesis Healthcare, Inc. (“Genesis”). As of ~~2018,~~June 30, 2019, the joint venture ~~sold 12 SNF facilities~~has 51 SNFs 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.~~

with Genesis.

We receive asset management fees from the joint venture for services provided. For the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, we recognized approximately $0.3 million and $0.5 million, respectively, of asset management ~~fees in each period.~~fees. For the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, we recognized $0.5 million and $1.0 million, respectively, of asset management ~~fees in each period.~~fees. These fees are included in miscellaneous income in the accompanying Consolidated Statements of Operations. The accounting policies for ~~the~~this 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.~~


	Properties Held For Sale
	Number of	Net Book Value
	Properties	(in thousands)
December 31, 2018	3	$	989
Properties sold ⁽¹⁾	(1)		(344)
March 31, 2019	2		645
Properties other ⁽¹⁾	(1)		(323)
Properties added	3		4,284
June 30, 2019 ⁽²⁾	4	$	4,606

(1) In the first quarter of 2019, we sold one facility for approximately $0.4 million in net cash proceeds recognizing a net gain on sale of approximately $3,000. In the second quarter of 2019, one facility was no longer considered held for sale and was reclassified to leased property at its net book value.

(2) We plan to sell the facilities classified as assets held for sale at June 30, 2019 within the next twelve months.

NOTE 9 – INTANGIBLES

The following is a summary of our intangibles as of June 30, ~~2018~~2019 and December 31, ~~2017~~:2018:


	June 30,		December 31,
	2019			2018
	(in thousands)
Assets:
Goodwill	$	643,875	$	643,950

Above market leases	$	49,240	$	22,410
Accumulated amortization		(19,772)		(19,203)
Net intangible assets	$	29,468	$	3,207

Liabilities:
Below market leases	$	151,158	$	143,669
Accumulated amortization		(83,181)		(79,226)
Net intangible liabilities	$	67,977	$	64,443

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

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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.

As disclosed in Note 2 – Properties and Investments, certain above market lease assets and below market lease liabilities acquired in the MedEquities Merger are subject to further adjustment pending completion of the purchase accounting.

For the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, our net amortization related to intangibles was ~~$2.6~~$1.6 million and ~~$3.1~~$2.6 million, respectively. For the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, our net amortization related to intangibles was ~~$5.3~~$3.4 million and ~~$6.2~~$5.3 million, respectively. The estimated net amortization related to these intangibles for the remainder of ~~2018~~2019 and the subsequent four years is as follows: remainder of ~~2018 – $4.3 million;~~ 2019 – ~~$8.2~~$2.6 million; 2020 – ~~$8.0~~$5.2 million; ~~2021– $7.6~~2021 – $5.0 million; 2022– $4.7 million and ~~2022~~2023 – ~~$7.0~~$4.5 million. As of June 30, ~~2018,~~2019, the weighted average remaining amortization period of above market ~~leases~~lease assets and below market ~~leases~~lease liabilities is approximately ~~seven~~11 years and ~~nine~~10 years, respectively.

The following is a summary of our goodwill as of June 30, ~~2018:~~2019:


	(in thousands)
Balance as of December 31, 2018	$	643,950
Less: foreign currency translation		(75)
Balance as of June 30, 2019	$	643,875

(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,~~2019, our portfolio of real estate investments consisted of ~~936~~949 healthcare facilities, located in 41 states and the U.K. and operated by 6775 third-party operators. Our investment in these facilities, net of impairments and allowances, totaled approximately ~~$8.6~~$9.2 billion at June 30, ~~2018,~~2019, with approximately ~~99%~~97% of our real estate investments related to long-term care facilities. Our portfolio is made up of ~~748~~746 SNFs, 117 ALFs, 1428 specialty facilities, ~~one~~two medical office ~~building,~~buildings, fixed rate mortgages on 5145 SNFs, ~~and~~ two ALFs and ~~three~~four specialty facilities and five facilities that are closed/held for sale. At June 30, ~~2018,~~2019, we also held other investments of approximately ~~$377.2~~$367.2 million, consisting primarily of secured loans to third-party operators of our facilities and ~~a $32.8~~$102.8 million ~~investment~~of investments in antwo unconsolidated joint ~~venture.~~

ventures.

At June 30, ~~2018,~~2019, we had investments with one operator/or manager that exceeded 10% of our total investments: ~~Ciena.~~Ciena Healthcare (“Ciena”). Ciena also generated approximately 11% of our total revenues for the three and six months ended June 30, 2019. Ciena generated approximately 10% of our total revenues for the three and six months ended June 30, ~~2018 and 2017.~~2018. At June 30, ~~2018,~~2019, the three states in which we had our highest concentration of investments were Texas ~~(10%~~(12%), Florida ~~(10%~~(9%) and Michigan ~~(8%~~(7%).

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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, 2019	February 15, 2019	$	0.66
April 30, 2019	May 15, 2019	$	0.66
July 31, 2019	August 15, 2019	$	0.66

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 )


	As of and For the				As of and For the
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands)
Foreign Currency Translation:
Beginning balance	$	(40,909)	$	(11,114)	$	(47,704)	$	(26,033)
Translation loss		(8,611)		(24,237)		(1,842)		(9,377)
Realized loss		(195)		(66)		(169)		(7)
Ending balance		(49,715)		(35,417)		(49,715)		(35,417)

Derivative Instruments:
Cash flow hedges:
Beginning balance		1,291		5,951		3,994		1,463
Unrealized (loss) gain		(5,728)		1,841		(8,739)		6,582
Realized gain (loss) ⁽¹⁾		344		(53)		652		(306)
Ending balance		(4,093)		7,739		(4,093)		7,739
Net investment hedge:
Beginning balance		(2,250)		(12,120)		70		(7,070)
Unrealized gain		3,040		8,150		720		3,100
Ending balance		790		(3,970)		790		(3,970)
Total accumulated other comprehensive loss for Omega OP⁽²⁾		(53,018)		(31,648)		(53,018)		(31,648)
Add: portion included in noncontrolling interest		2,299		1,491		2,299		1,491
Total accumulated other comprehensive loss for Omega	$	(50,719)	$	(30,157)	$	(50,719)	$	(30,157)

(1)

⁽¹⁾

Recorded in interest expense on the Consolidated Statements of Operations.

(2)

⁽²⁾

These amounts are included in ~~owners’ equity.~~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.

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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,~~2019, 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~~three of our active subsidiaries to be treated as TRSs. ~~One~~Two of our TRSs isare domestic and are 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,~~2019, one of our ~~TRS that is subject to federal, state and local income taxes at the applicable corporate rates~~domestic TRSs had a net operating loss carry-forward of approximately ~~$5.8~~$5.7 million. The loss carry-forward is fully reserved as of June 30, ~~2018,~~2019, with a valuation allowance due to uncertainties regarding realization. Our net operating loss carryforwards will be carried forward for no more than 20 ~~years.~~years, subject to certain limitations. In connection with the MedEquities Merger on May 17, 2019, we acquired MedEquities Realty TRS, LLC. MedEquities Realty TRS, LLC has no assets, liabilities, revenues or expenses and, accordingly, we have no tax accrual or net operating loss carryforward associated with this entity as of June 30, 2019.

For the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, we recorded approximately ~~$0.2~~$0.3 million and ~~$0.5~~$0.2 million, respectively, of state and local income tax ~~provision.~~provisions. For the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, we recorded approximately ~~$0.3~~$0.4 million and ~~$1.5~~$0.3 million, respectively, of state and local income tax ~~provision.~~provisions. For the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, we recorded approximately ~~$0.6~~$0.5 million and ~~$0.1~~$0.6 million, respectively, of tax ~~provision~~provisions for foreign income taxes. For the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, we recorded approximately ~~$1.0~~$1.1 million and ~~$0.2~~$1.0 million, respectively, of tax ~~provision~~provisions 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, 2019 and 2018, ~~and 2017,~~ respectively:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands)
Stock-based compensation expense	$	4,040	$	4,089	$	8,110	$	8,145

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

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Time Based Restricted ~~Stock and Restricted Stock Units~~Equity Awards

~~Restricted~~Time-based restricted equity awards include restricted stock, ~~and~~ restricted stock units (“RSUs”) and profit interest units. These awards 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. Profit interest units accrue distributions, which are equivalent to dividend equivalents, but have no voting rights. Once vested, each RSU is convertible into one share of Omega common stock and each profit interest unit is convertible into one partnership unit in Omega OP (“Omega OP Unit”), subject to certain conditions. Restricted stock and RSUs are valued at the price of our common stock on the date of grant. The profit interest units are valued using a Monte Carlo model to estimate the fair value. We expense the cost of these awards ratably over their vesting period. We awarded ~~169,900~~34,672 RSUs and 91,992 profit interest units to employees on January 1, ~~2018.~~2019.

Performance-Based Restricted Equity Awards

~~Performance Restricted Stock Units~~Performance-based restricted equity awards include performance restricted stock units (“PRSUs”) and ~~LTIP Units~~

profit interest units. Performance restricted stock units (“PRSUs”) and ~~long term incentive plan~~profit interest 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~~profit interest units have varying degrees of performance requirements to achieve vesting, and each PRSU and ~~LTIP Units~~profit interest unit award represents the right to a variable number of shares of common stock or partnership units. Each ~~LTIP Unit~~profit interest 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”).~~Index. Vesting, in general, requires that the employee remain employed by us until the date specified in the applicable PRSU or ~~LTIP~~profit interest unit 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 or profit interest units, ownership of the PRSUs or profit interest units 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~~profit interest 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~~profit interest unit accumulate, and if the ~~LTIP Units are~~profit interest unit is earned, the accumulated distributions are paid.

The number of shares or units earned under the TSR PRSUs or ~~LTIP Units~~profit interest units depends generally on the level of achievement of Omega’s TSR over the indicated performance period. We awarded ~~677,488 LTIP Units~~133,887 TSR PRSUs and 377,766 TSR profit interest units to employees on January 1, ~~2018.~~

2019.

The number of shares or units earned under the Relative TSR PRSUs or profit interest units 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~~79,844 Relative TSR PRSUs and 231,087 Relative TSR profit interest units to employees on January 1, ~~2018.~~2019.

~~The following table summarizes our total unrecognized compensation cost as~~Table of ~~June 30, 2018 associated with RSUs, PRSU awards, and LTIP Unit awards to employees:~~Contents

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


		Annual
		Interest Rate
		as of
		June 30,		June 30,		December 31,
	Maturity	2019		2019		2018
				(in thousands)
Secured borrowings:
Term loan ⁽¹⁾	2021	5.75	%	$	2,275	$	—

Unsecured borrowings:
Revolving line of credit	2021	3.65	%		500,000		313,000

U.S. term loan	2022	3.85	%		425,000		425,000
Sterling term loan ⁽²⁾	2022	2.17	%		127,270		127,990
Omega OP term loan⁽³⁾	2022	3.85	%		100,000		100,000
2015 term loan	2022	3.80	%		250,000		250,000
Discounts and deferred financing costs – net⁽⁴⁾					(3,666)		(4,264)
Total term loans – net					898,604		898,726

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
Subordinated debt	2021	9.000	%		20,000		20,000
Discount – net					(17,245)		(18,523)
Deferred financing costs – net					(20,850)		(22,581)
Total senior notes and other unsecured borrowings – net					3,331,905		3,328,896

Total unsecured borrowings – net					4,730,509		4,540,622

Total secured and unsecured borrowings – net⁽⁵⁾				$	4,732,784	$	4,540,622

(1)

⁽¹⁾

~~These amounts represent borrowings that were incurred by Omega OP or wholly owned subsidiaries~~This borrowing is the debt of ~~Omega OP.~~a consolidated joint venture.

(2)

⁽²⁾

This borrowing is denominated in British Pounds Sterling.

(3)	⁽³⁾Omega OP is the obligor on this borrowing.

(4)	The amount includes ~~$0.5~~$0.4 million of net deferred financing costs related to the Omega OP term loan as of June 30, ~~2018.~~2019.

(5)

⁽⁴⁾

All borrowings are direct borrowings of Omega unless otherwise noted.

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2017 Omega OP Term Loan Facility

~~HUD Mortgage Disposition~~

On ~~June 1, 2018, subsidiaries~~May 25, 2017, Omega OP entered into a credit agreement (the “2017 Omega OP Credit Agreement”) providing it with a $100 million senior unsecured term loan facility (the “2017 Omega OP Term Loan Facility”). The 2017 Omega OP Credit Agreement replaced the $100 million senior unsecured term loan facility obtained by Omega OP in 2015. The 2017 Omega OP Term Loan Facility bears interest at LIBOR plus an applicable percentage (with a range of ~~an existing operator~~90 to 190 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. The 2017 Omega OP Term Loan Facility matures on May 25, 2022.

In connection with the MedEquities Merger on May 17, 2019, we assumed ~~approximately $53~~various interest rate swap contracts. We designated the interest rate swap contracts as cash flow hedges of interest rate risk associated with the 2017 Omega OP Credit Agreement. The assumed interest rate swap contracts effectively convert $75 million of our ~~indebtedness guaranteed~~2017 Omega OP Credit Agreement to an aggregate fixed rate of approximately 3.29% through February 10, 2022. The effective fixed rate achieved by ~~HUD that secured 12 separate facilities located in Arkansas.~~ the combination of the 2017 Omega OP Credit Agreement and the interest rate swaps could fluctuate up by 55 basis points or down by 45 basis points based on future changes to our credit ratings. The 2017 Omega OP Credit Agreement will be unhedged for the period after February 10, 2022 through its maturity on May 25, 2022.

Other Debt Assumption and Repayment

In connection with ~~our disposition~~the MedEquities Merger on May 17, 2019, we assumed a $125.0 million term loan and outstanding borrowings of $160.1 million under MedEquities’ previous revolving credit facility. We repaid the ~~mortgages we wrote-off approximately $0.6 million of unamortized deferred costs that are recorded in (Loss) gain~~total outstanding balance on ~~assets sold – net~~both the term loan and the revolving credit facility and terminated the related agreements 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.May 17, 2019.

General

Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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.

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NOTE 15 – FINANCIAL INSTRUMENTS

The net carrying amount of cash and cash equivalents, restricted cash, contractual receivables, other assets and accrued expenses and other liabilities reported in the Consolidated Balance Sheets approximates fair value because of the short maturity of these instruments (Level 1).

At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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


	June 30, 2019				December 31, 2018
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)
Assets:
Investments in direct financing leases – net	$	11,709	$	11,709	$	132,262	$	132,262
Mortgage notes receivable – net		774,327		805,100		710,858		735,892
Other investments – net		367,233		357,575		504,626		503,907
Total	$	1,153,269	$	1,174,384	$	1,347,746	$	1,372,061
Liabilities:
Revolving line of credit	$	500,000	$	500,000	$	313,000	$	313,000
Secured borrowing		2,275		2,275		—		—
U.S. term loan		423,347		425,000		423,065		425,000
Sterling term loan		126,762		127,270		127,394		127,990
Omega OP term loan⁽¹⁾		99,619		100,000		99,553		100,000
2015 term loan		248,876		250,000		248,713		250,000
4.375% notes due 2023 – net		695,227		728,553		694,643		700,062
4.95% notes due 2024 – net		395,197		424,321		394,691		406,386
4.50% notes due 2025 – net		395,782		418,612		395,402		392,122
5.25% notes due 2026 – net		595,379		656,893		595,027		605,700
4.50% notes due 2027 – net		688,713		732,547		687,981		671,555
4.75% notes due 2028 – net		541,387		584,340		540,883		537,508
Subordinated debt – net		20,220		22,678		20,270		22,589
Total	$	4,732,784	$	4,972,489	$	4,540,622	$	4,551,912

(1)

⁽¹⁾

~~These amounts represent borrowings~~This amount represents a borrowing that ~~were~~was 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)~~2018). 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,~~For the Orianna direct financing lease as of December 31, 2018, the Company ~~may estimate~~estimated the fair value of its investment based on the ~~estimated fair value of~~expected liquidating payments from the ~~collateral using a market approach or an income approach which considers inputs such~~Trust as ~~current and projected operating performance of the facilities, projected rent, prevailing capitalization rates and/or coverages and bed values~~further described in Note 3 – Direct Financing Leases (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).

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·●

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, secured borrowing 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 (the “Court”), Case No. 1:~~17-cv-08983-NRB (the “Gronich Securities Class Action”).~~17-cv-08983-NRB. 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”).~~17-cv-09024-NRB. 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”~~“Securities Class Action”). 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~~Securities Class Action filed a Motion to Dismiss on July 17, ~~2018. Briefing~~2018 and the Court heard Oral Argument on February 13, 2019. On March 25, 2019, the ~~Motion~~Court entered an order dismissing with prejudice all claims against all defendants. On April 22, 2019, the plaintiffs filed a Notice of Appeal with the United States District Court for the Southern District of New York, notifying the Court that they are appealing the Court’s order of dismissal with prejudice to ~~Dismiss is to be completed by September 14, 2018.~~

~~Although~~the United States Court of Appeals for the Second Circuit. On June 10, 2019, the plaintiffs filed their appeal brief with the United States Court of Appeals for the Second Circuit, on July 15, 2019, the Company ~~denies~~filed its opposition brief, and on July 29, 2019, the ~~material allegations~~Plaintiffs filed their reply brief in further support of the ~~Securities Class Action and intends to vigorously pursue its defense, we are in the very early stages~~appeal.

Table of ~~this litigation and are unable to predict the outcome of the case or to estimate the amount of potential costs.~~Contents

The ~~Company’s~~ Board of Directors received a demand letter, dated April 9, 2018, from an attorney ~~for~~representing Phillip Swan (“Swan”), a purported current shareholder of the Company, relating to the subject matter covered by the Securities Class Action (the ~~“Shareholder~~“Swan 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. After an investigation and due consideration, and in the exercise of its business judgment, the Board determined that it is not in the best interests of the Company to commence litigation against any current or former officers or directors based on the matters raised in the Swan Shareholder Demand. In November 2018, the Board also received shareholder demands from two additional purported shareholders, Tom Bradley (“Bradley”) and Sarah Smith (“Smith”), each represented by the same counsel as Swan, that were substantively identical to the Swan Shareholder Demand (the “Bradley/Smith Shareholder Demands”). The Board reached the same conclusion with respect to those demands as it reached with the Swan Shareholder Demand.

On August 22, 2018, Stourbridge Investments LLC, a purported stockholder of ~~Directors is reviewing~~ the Company, filed a derivative action purportedly on behalf of the Company in the United States District Court for the Southern District of New York against the current directors of the Company as well as certain officers alleging violations of Section 14(a) of the Securities Exchange Act of 1934 and state-law claims including breach of fiduciary duty. Stourbridge Investments LLC v. Callen et al., No. 1:18-cv-07638. The complaint alleges, among other things, that the defendants are responsible for the Company’s failure to disclose the financial condition of Orianna Health Systems, the alleged non-disclosures that are also the subject of the Securities Class Action described above. The defendants in the action are the three individual defendants named in the Securities Class Action (Messrs. Pickett, Booth and Stephenson), as well as the Company’s non-management directors. The plaintiff did not make a demand on the Company to bring the action prior to filing it, but rather alleges that demand would have been futile. The parties have entered into a stipulation in which they agreed to stay the case, including any response by defendants, pending the entry of judgment or a voluntary dismissal with prejudice in the Securities Class Action. The agreed-upon stipulation and order to stay the case were entered by the Court on October 25, 2018. In addition, on January 30, 2019, Swan filed a derivative action in the Baltimore City Circuit Court of Maryland, purportedly on behalf of the Company against certain current and former directors of the Company as well as certain officers, asserting claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment. Swan v. Pickett, et al., No. 24-C-19-000573. Swan alleges that the Swan Shareholder Demand was wrongfully refused. On February 21, 2019, Bradley and Smith filed a derivative action in the Baltimore City Circuit Court of Maryland, purportedly on behalf of the Company against certain current and former directors of the Company as well as certain officers, asserting claims for breach of fiduciary duty, abuse of control, gross mismanagement, and unjust enrichment. Bradley and Smith v. Callen, et al., No. 24-c-19-000972. Bradley and Smith allege that the Bradley/Smith Shareholder Demands were wrongly refused. No response date for the defendants has yet come due.

Separately, four lawsuits have been filed by purported stockholders of MedEquities against MedEquities and its directors challenging the proposed merger between MedEquities and the Company. Two of the lawsuits also name the Company as a defendant.

On February 21, 2019, a purported stockholder of MedEquities filed a lawsuit against MedEquities, members of the MedEquities board of directors, and the Company in the United States District Court for the District of Maryland. Brekka v. MedEquities Realty Trust, Inc., et al., Case 1:19-cv-00535-JKB. The complaint alleges, among other things, that MedEquities, members of the MedEquities’ Board, and the Company violated Section 14(a) of the Securities Exchange Act by making materially incomplete and misleading statements in, and/or omitting certain information that is material to stockholders from, the Registration Statement on Form S-4 , as filed with the SEC on February 11, 2019 (the “Form S-4”), relating to the merger. The complaint seeks, among other things, an injunction preventing the consummation of the merger and, in the event the merger is consummated, rescission of the merger or damages, plus attorneys’ fees and costs. By Order dated July 9, 2019, the United States District Court for the District of Maryland directed the plaintiff to advise it by July 15, 2019 whether he intended to rely on his current complaint, amend the complaint or dismiss the action. Plaintiff responded on July 15, 2019 by stating that he intended to rely on his current complaint. The United States District Court for the District of Maryland that same day issued an order directing that defendants respond to that complaint by September 16, 2019.

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On February 22, 2019, another purported stockholder of MedEquities filed a derivative and class action lawsuit against MedEquities, members of the MedEquities board of directors, and the Company in the Circuit Court for Baltimore City, Maryland. Scarantino v. McRoberts et al., Case No. 24-c-19-001027. The complaint alleges, among other things, breaches of fiduciary duties by the MedEquities’ board of directors in connection with its approval of the merger and the omission from the Form S-4 of certain information that is material to stockholders. The complaint seeks, among other things, an injunction preventing the consummation of the merger and, in the event the merger is consummated, rescission of the merger or damages, plus attorneys’ fees and costs. The plaintiff has not served summonses upon the defendants in this action.

On March 17, 2019, a purported stockholder of MedEquities filed a class action lawsuit against MedEquities and members of the MedEquities board of directors in the United States District Court for the Middle District of Tennessee. Bushansky v. MedEquities Realty Trust, Inc., et al., Case 3:19-cv-00231. The complaint alleges, among other things, that MedEquities and its directors violated Section 14(a) of the Securities Exchange Act by making materially incomplete and misleading statements in, and/or omitting certain information that is material to stockholders from, the Combined Proxy Statement and Form S-4, relating to the merger. The complaint seeks, among other things, an injunction preventing the consummation of the merger and, in the event the merger is consummated, rescission of the merger or damages, plus attorneys’ fees and costs. By Stipulation and Order dated May 15, 2019, the United States District Court for the Middle District of Tennessee stayed all deadlines in the action pending, among other things, the appointment of a lead plaintiff and the designation of an operative complaint or the filing of an amended complaint. By Order filed on July 9, 2019, the Court, in response to a joint motion by the parties, continued the Initial Case Management Conference scheduled for July 16, 2019 and confirmed that all the deadlines in the cases were stayed until after a ruling on any motion to dismiss the operative complaint or amended complaint or until Defendants have filed an answer to the complaint or amended complaint. In addition, the plaintiff in this action on July 10, 2019 filed a motion asking that he be appointed lead plaintiff and that his counsel be appointed lead counsel.

On March 29, 2019, a purported stockholder of MedEquities filed a class action lawsuit against MedEquities and members of the MedEquities board of directors in the Circuit Court of Maryland, Baltimore City, Maryland alleging, among other things, that MedEquities and members of the MedEquities board of directors breached their fiduciary duties by: (i) failing to fulfill their fiduciary oversight function; (ii) authorizing the filing of a materially incomplete and misleading proxy statement/prospectus; and (iii) authorizing in the company’s Amended and Restated Bylaws the enactment of an exclusive venue designation whereby the Circuit Court for Baltimore City, Maryland is the sole and exclusive forum for certain litigation against the company, or if that court does not have jurisdiction, the U.S. District Court for the District of Maryland, Baltimore Division (the “Exclusive Venue Bylaw”). Russell v. MedEquities Realty Trust, Inc., et al., Case No. C-03-CV-19-000721. The complaint seeks, among other things, an injunction preventing the special meeting of MedEquities stockholders to vote on the transaction and, in the event the transaction is implemented, rescission of the transaction or damages, a declaration that the Exclusive Venue Bylaw is invalid, an injunction preventing the enforcement of the Exclusive Venue Bylaw, and attorneys’ fees and costs. On May 10, 2019, the parties filed a stipulation requiring plaintiff to file, within 30 days of the closing of the merger, an amended complaint or notify defendants that plaintiff does not intend to file an amended complaint, and requiring defendants to respond to plaintiff’s pleading or amended pleading within 60 days thereafter. As of this date, the plaintiff has neither filed an amended complaint nor notified that he does not intend to file an amended complaint.

In September 2016, MedEquities received a Civil Investigative Demand (“CID”) from the U.S. Department of Justice (“DOJ”), which indicates that it is conducting an investigation regarding alleged violations of the False Claims Act, Stark Law and Anti-Kickback Statute in connection with claims that may have been submitted to Medicare and other federal payors for services rendered to patients at Lakeway Hospital or by providers with financial relationships with Lakeway Hospital. As a result of the acquisition of MedEquities, the Company owns a 51% interest in an unconsolidated partnership that owns Lakeway Hospital (the “Lakeway Partnership”). The CID requested certain documents and information related to the acquisition and ownership of Lakeway Hospital through the Lakeway Partnership. The Company has learned that the DOJ is investigating MedEquities’ conduct in connection with its investigation of financial relationships related to Lakeway Hospital, including allegations by the DOJ that these relationships violate and continue to violate the Anti-Kickback Statute and, as a result, related claims submitted to federal payors violated and continue to violate the False Claims Act. The Company is cooperating fully with the DOJ in connection with the CID and has produced all of the information that has been requested to date.

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The Company believes that the acquisition, ownership and leasing of Lakeway Hospital through the Lakeway Partnership was and is in compliance with all applicable laws. However, due to the uncertainties surrounding this matter and its ultimate outcome, we are unable to determine any estimate or range of loss.

The Company believes that the ~~appropriate course of action.~~claims asserted against it in these lawsuits are without merit and intend to vigorously defend against them.

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.

Indemnifications

~~Commitments~~In connection with certain facility transitions, we provided certain operators with indemnifications. As of June 30, 2019, our maximum funding commitment under these indemnifications approximates $17.3 million. Claims against these indemnifications may occur within 18 months to 72 months of the transition date. These indemnifications were provided to these operators upon transition and would be utilized in the event that the prior operators do not perform under their transition agreements. The Company does not expect to fund a material amount under these indemnification agreements.

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,~~2019, are outlined in the table below (in thousands):

Total commitment $ 730,009
Amounts funded⁽¹⁾ (450,050 )
Remaining commitment $ 279,959



Total commitments	$	581,813
Amounts funded to date⁽¹⁾		(432,455)
Remaining commitments	$	149,358

⁽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 profit interest units, performance restricted stock and profit interest 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 profit interest units and performance restricted ~~stock.~~stock and profit interest units.

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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,
	2019		2018		2019		2018
	(in thousands, except per share amounts)
Numerator:
Net income	$	75,671	$	81,986	$	147,853	$	169,919
Less: net income attributable to noncontrolling interests		(2,530)		(3,450)		(5,010)		(7,163)

Net income available to common stockholders/Omega OP Unit holders	$	73,141	$	78,536	$	142,843	$	162,756
Denominator:
Denominator for basic earnings per share		211,569		199,497		208,064		199,204
Effect of dilutive securities:
Common stock equivalents		1,592		197		1,640		167
Noncontrolling interest – Omega OP Units		7,318		8,766		7,298		8,768
Denominator for diluted earnings per share/unit		220,479		208,460		217,002		208,139

Earnings per share/unit - basic:
Net income available to common stockholders/Omega OP Unit holders	$	0.35	$	0.39	$	0.69	$	0.82
Earnings per share/unit – diluted:
Net income	$	0.34	$	0.39	$	0.68	$	0.82

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


	Omega OP
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands, except per share amounts)
Numerator:
Net income	$	75,671	$	81,986	$	147,853	$	169,919

Denominator:
Denominator for basic earnings per unit		218,887		208,263		215,362		207,972
Effect of dilutive securities:
Omega OP Unit equivalents		1,592		197		1,640		167
Denominator for diluted earnings per unit		220,479		208,460		217,002		208,139

Earnings per unit - basic:
Net income available to Omega OP Unit holders	$	0.35	$	0.39	$	0.69	$	0.82
Earnings per unit - diluted:
Net income	$	0.34	$	0.39	$	0.68	$	0.82

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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~~2019 and ~~2017:~~2018:


	Six Months Ended June 30,
	2019		2018
	(in thousands)
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents	$	32,766	$	10,951
Restricted cash		1,372		2,598
Cash, cash equivalents and restricted cash at end of period	$	34,138	$	13,549

Supplemental information:
Interest paid during the period, net of amounts capitalized	$	102,200	$	108,317
Taxes paid during the period	$	2,284	$	2,072

Non cash investing activities
Non cash acquisition of a business (see Note 2)	$	(566,966)	$	—
Non cash acquisition of real estate (see Note 2)		(143,174)		(880)
Non cash proceeds from sale of real estate investments		—		53,118
Non cash collection of mortgage principal		11,874		—
Non cash investment of other investments		(25,925)		(11,026)
Non cash proceeds from other investments		149,542		7,000
Non cash proceeds from direct financing lease		4,970		—
Initial non cash right of use asset - ground leases		5,593		—
Initial non cash lease liability - ground leases		(5,593)		—
Total	$	(569,679)	$	48,212

Non cash financing activities
Debt assumed in merger (see Note 2)	$	285,100	$	—
Stock exchanged in merger (see Note 2)		281,865		—
Change in fair value of cash flow hedges		(7,641)		6,233
Remeasurement of debt denominated in a foreign currency		(720)		(3,100)
Non cash disposition of other long-term borrowings		—		(53,118)
Total	$	558,604	$	(49,985)

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

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NOTE 19 – SUBSEQUENT ~~EVENTS~~EVENT

On July ~~23, 2018, Omega notified Orianna that it was in default under~~26, 2019, the ~~DIP facility and, as a result~~Company entered into an agreement to purchase 60 facilities for $735 million consisting 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 useapproximately $345 million of cash ~~collateral solely to payment~~and the assumption of ~~those amounts contained in a budget approved by Omega. Omega also informed Orianna that while Omega did not~~approximately $390 million (as of ~~such date) intend~~August 1, 2019) in mortgage loans guaranteed by the U.S. Department of Housing and Urban Development (“HUD”). These loans have a blended “all-in” rate (including Mortgage Insurance Premiums) of 3.66% per annum with maturities between September 2046 and December 2051.

The 60 facilities consist of 58 SNFs and two ALFs representing 6,590 operating beds, located in eight states and are leased to ~~immediately collect amounts owing under the DIP facility, Omega may at any time~~two operators in ~~the future exercise further rights and remedies under the DIP facility.~~three triple net leases generating approximately $64 million in 2020 annual contractual cash rent.

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 residentsCompletion of the ~~facilities. On July 1, 2018, we transitioned~~transaction is subject to consent by HUD as well as the ~~legacy Orianna portfolio in Mississippi (13 facilities)~~satisfaction of customary closing conditions. No assurance can be given as to ~~an existing Omega operator with annual contractual rent~~when or if (i) HUD’s consent will be obtained, (ii) the closing conditions will be satisfied and (iii) the acquisition will be completed.

Table 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.~~ Contents

Item 2 – ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and Factors Affecting Future Results

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this document, including statements regarding potential future changes in reimbursement. This document contains “forward-looking statements” within the meaning of the federal securities laws. These statements relate to our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements other than statements of historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, terms such as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or comparable terms or the negative thereof. These statements are based on information available on the date of this filing and only speak as to the date hereof and no obligation to update such forward-looking statements should be assumed. Our actual results may differ materially from those reflected in the forward-looking statements contained herein as a result of a variety of factors, including, among other things:

(i)

those items discussed under “Risk Factors” in Part I, Item 1A to our annual report on Form ~~10-K;~~10-K;

(ii)

uncertainties relating to the business operations of the operators of our assets, including those relating to reimbursement by third-party payors, regulatory matters and occupancy levels;

(iii)

the ability of any of Omega’s operators in bankruptcy to reject unexpired lease obligations, modify the terms of Omega’s mortgages and impede the ability of Omega to collect unpaid rent or interest during the pendency of a bankruptcy proceeding and retain security deposits for the ~~debtor's~~debtor’s obligations, and other costs and uncertainties associated with operator bankruptcies;

(iv)

our ability to re-lease, otherwise transition, or sell underperforming assets ~~on a timely basis and on terms that allow us to realize the carrying value of these assets;~~

~~(v)~~

~~our ability to sell~~or assets held for sale on a timely basis and on terms that allow us to realize the carrying value of these assets;

~~(vi)~~(v)

the availability and cost of capital to us;

~~(vii)~~(vi)

changes in our credit ratings and the ratings of our debt securities;

~~(viii)~~(vii)

competition in the financing of healthcare facilities;

~~(ix)~~(viii)

regulatory and other changes in the healthcare sector;

~~(x)~~(ix)

changes in the financial position of our operators;

~~(xi)~~(x)

the effect of economic and market conditions generally and, particularly, in the healthcare industry;

(xi)

changes in interest rates;

(xii)

~~changes in interest rates;~~

~~(xiii)~~

the amount and yield of any additional investments;

~~(xiv)~~(xiii)

changes in tax laws and regulations affecting real estate investment trusts (“REITs”);

~~(xv)~~(xiv)

the potential impact of changes in the skilled nursing facility (“SNF”) and assisted living facility (“ALF”) markets or local real estate conditions on our ability to dispose of assets held for sale for the anticipated proceeds or on a timely basis, or to redeploy the proceeds therefrom on favorable terms; and

~~(xvi)~~(xv)

our ability to maintain our status as a REIT.

Overview

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~~All of ~~Omega's~~Omega’s assets are owned directly or indirectly by, and all of ~~Omega's~~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.

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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 ~~SNFs~~skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”), and to a lesser extent, ~~ALFs,~~ independent living facilities, ~~and~~ rehabilitation and acute care ~~facilities.~~facilities (“specialty facilities”) and medical office buildings (“MOBs”). Our core portfolio consists of long-term leases and mortgage agreements. ~~All~~Except for one MOB, 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~~is derived from fixed and variable rate loans to our operators to fund working capital and capital expenditures. These loans, which ~~are~~may be either unsecured or secured by the collateral of the ~~borrower.~~

borrower, are classified as other investments.

Our portfolio of real estate investments at June 30, 2018, 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: (i) 748 SNFs, (ii) 117 ALFs, (iii) 14 specialty facilities, (iv) one medical office building, (v) fixed rate mortgages on 51 SNFs and two ALFs and (vi) 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.

In 2017, we began implementation of a strategic asset repositioning program, disposing of non-core assets and reinvesting the proceeds in assets we envision holding for the long-term. This program is expected to continue for much of 2018 and is designed to position the Company for future growth.

~~As of June 30, 2018 and December 31, 2017, we do not have any material properties or operators with facilities that are not materially occupied.~~

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.~~Omega and (iv) other entities in which Omega or Omega OP has a majority voting interest and control. 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.~~OP and (iii) other entities in which Omega OP has a majority voting interest and control. Omega OP’s net earnings are reduced by the portion of net earnings attributable to the noncontrolling interest. All intercompany transactions and balances have been eliminated in consolidation.

~~Taxation~~

As of June 30, 2019, our portfolio of real estate investments consisted of 949 healthcare facilities, located in 41 states and the U.K. and operated by 75 third-party operators. Our investment in these facilities, net of impairments and allowances, totaled approximately $9.2 billion at June 30, 2019, with approximately 97% of our real estate investments related to long-term care facilities. Our portfolio is made up of 746 SNFs, 117 ALFs, 28 specialty facilities, two medical office buildings, fixed rate mortgages on 45 SNFs, two ALFs and four specialty facilities and five facilities that are closed/held for sale. At June 30, 2019, we also held other investments of approximately $367.2 million, consisting primarily of secured loans to third-party operators of our facilities and $102.8 million of investments in two unconsolidated joint ventures.

As of June 30, 2019 and December 31, 2018, we do not have any material properties or operators with facilities that are not materially occupied.

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Taxation

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.

Government Regulation and Reimbursement

The healthcare industry is heavily regulated. Our operators are subject to extensive and complex federal, state and local healthcare laws and regulations. These laws and regulations are subject to frequent and substantial changes resulting from the adoption of new legislation, rules and regulations, and administrative and judicial interpretations of existing law. The ultimate timing or effect of these changes, which may be applied retroactively, cannot be predicted. Changes in laws and regulations impacting our operators, in addition to regulatory non-compliance by our operators, can have a significant effect on the operations and financial condition of our operators, which in turn may adversely impact us. There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others. The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.

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Healthcare Reform. A substantial amount of rules and regulations have been issued under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act of 2010 (collectively referred to as the “Healthcare Reform Law”). The ~~new~~current administration has brought several Congressional efforts to repeal and replace the Affordable Care Act. ~~Under any new legislation, we~~We expect additional rules, regulations and judicial interpretations in response to legal and other constitutional challenges to be issued that may materially affect our operators’ financial condition and operations. Even if the Healthcare Reform Law is not ultimately amended or repealed, the ~~new~~current administration or Congress could propose changes impacting implementation of the Healthcare Reform Law. The ultimate composition and timing of any legislation enacted under the ~~new~~current administration that would impact the current implementation of the Healthcare Reform Law remains uncertain. Given the complexity of the Healthcare Reform Law and the substantial requirements for regulation thereunder, the impact of the Healthcare Reform Law on our operators or their ability to meet their obligations to us cannot be predicted, whether in its current form or as amended or repealed.

Reform Requirements for Long-Term Care Facilities. On October 4, 2016, the Centers for Medicare and Medicaid Services (“CMS”) issued a final rule modifying the conditions of participation in Medicare and Medicaid for SNFs. CMS stated that the regulations, last updated in 1991, were “necessary to reflect the substantial advances that had been made over the past several years in the theory and practice of service delivery and safety” within long-term care. The extensive modifications require SNFs to implement new processes; make changes to current practices; and create new policies and procedures within a short timeframe to remain in compliance with their conditions for participation. Changes include provisions related to staff training, discharge planning, infection prevention and control programs, and pharmacy services, among others. While many of the regulations became effective on November 28, 2016, some of the regulations became effective in Phase 2 on November 28, 2017, with others becoming effective in Phase 3, beginning on November 28, 2019. CMS initially delayed for eighteen months the imposition of any fines for failure to implement Phase 2 of the new “Requirements of Participation” implemented in November 2017. However, CMS ~~also announced a freeze~~advised in March 2019 that the moratorium on ~~the inspection star ratings for any surveys occurring between November 28, 2017 and November 27, 2018.~~financial penalties will expire in May 2019, as previously indicated. CMS ~~estimates~~estimated the average cost for a SNF to implement the ~~new~~2016 regulations ~~is estimated~~ to be $62,900 the first year and $55,000 each year thereafter.

Reimbursement Generally. A significant portion of our operators’ revenue is derived from government-funded reimbursement programs, consisting primarily of Medicare and Medicaid. As federal and state governments continue to focus on healthcare reform initiatives, and as the federal government and many states face significant current and future budget deficits, efforts to reduce costs by government payors will likely continue, which may result in reductions in reimbursement at both the federal and state levels. Additionally, new and evolving payor and provider programs, including but not limited to Medicare Advantage, dual eligible, accountable care organizations, and bundled payments could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations. Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could have a material adverse effect on our operators’ results of operations and financial condition, which could adversely affect our operators’ ability to meet their obligations to us.

Medicaid. State budgetary concerns, coupled with the implementation of rules under the Healthcare Reform Law, or prospective changes to the Healthcare Reform Law under the ~~new~~current administration or Congress, may result in significant changes in healthcare spending at the state level. Many states are currently focusing on the reduction of expenditures under their state Medicaid programs, which may result in a reduction in reimbursement rates for our operators. The need to control Medicaid expenditures by the states may be exacerbated by the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes. Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the ~~number~~percentage of Medicaid patients could adversely affect our operators’ results of operations and financial condition, which in turn could negatively impact us.

~~The Healthcare Reform Law provided~~In the state of Florida, the average Medicaid reimbursement rate for SNFs decreased 4.5% effective July 1, 2019, resulting from the loss of one-time discretionary funding applied to October 1, 2018 Florida Medicaid ~~coverage~~reimbursement rates to ~~be expanded~~cover the impact of hold-harmless provisions in the new, price-based Prospective Payment System (“PPS”) enacted by Florida at that time. However, the net impact of this rate decrease was to ~~all individuals under age 65 with incomes up~~revert the average rate approximately to ~~133% of~~ the ~~federal poverty~~pre-PPS, cost-based level beginning January 1, 2014. While the federal government committed to paying the entire cost for Medicaid coverage for newly eligible beneficiaries from 2014 through 2016, the federal share declines to 95% in 2017, 94% in 2018, 93% in 2019, and 90% in 2020 and subsequent years. Although the Supreme Court ruled on June 28, 2012 that states could not be required to expand Medicaid or risk losing federal funding of their existing Medicaid programs, as of ~~July 12,~~September 30, 2018, ~~thirty-four (34) states and~~which we believe operators can generally address with operational adjustments to maintain coverage levels. A smaller discretionary increase effective October 1, 2019 will increase the ~~District~~average rate by 0.7%. When the transition hold-harmless provisions expire on September 30, 2021, the PPS rates will no longer be dependent on discretionary funding levels. At June 30, 2019, 9% of ~~Columbia have expanded Medicaid eligibility with additional states continuing to consider expansion.~~our investments were in Florida.

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Medicare. On July 31, ~~2017,~~2018, CMS issued a final rule regarding the fiscal year (“FY”) ~~2018~~2019 Medicare payment rates and quality payment programs for SNFs, which continues the trend of shifting Medicare payments from volume to value. Proposed aggregate payments to SNFs, which became effective October 1, ~~2017~~2018 for FY ~~2018~~2019, are expected to increase by ~~$370~~$820 million ~~or 1.0%,~~ over FY 2017 payments. This reimbursement increase is attributable to a ~~1.0%~~2.4% market basket increase as required under the ~~Medicare Access and CHIP Reauthorization~~Bipartisan Budget Act of ~~2015 (“MACRA”) after application of the productivity adjustment. Additionally, as~~2018. As mandated by the Improving Medicare Post-Acute Care Transformation Act of 2014 (“IMPACT Act”), the annual update is reduced by 2two percentage points for SNFs that fail to submit required quality data to CMS under the SNF Quality Reporting Program (“QRP”)~~, beginning~~.

Payments to providers are being increasingly tied to quality and efficiency. CMS finalized the previously proposed rule to replace the SNF PPS RUG-IV case-mix classification methodology with ~~FY 2018.~~a new value-based Patient Driven Payment Model (“PDPM”). The ~~application~~PDPM is designed to improve the incentives to treat the needs of ~~this penalty~~the whole patient, rather on the volume of services the patient receives. The PDPM will be effective October 1, 2019 (FY 2020) to ~~those~~allow time for education and training of SNFs ~~that do not meet the requirements~~in preparation for the ~~FY 2018 SNF QRP would produce a market basket index percentage change that is less than zero and would also result in FY 2018~~new payment ~~rates that are less than such payment rates for~~model.

These prospective reimbursement changes as well as the ~~preceding fiscal year. Similarly, a~~ value-based purchasing ~~program~~programs applicable to SNFs under the 2014 Protecting Access to Medicare Act, ~~(“PAMA”) legislation discounts SNF Medicare Fee-for-Service (“FFS”) payments by 2% commencing~~which became effective on October 1, 2018, (FY 2019), with reimbursement of those discounts to SNF based on comparative rehospitalization metrics. Beginning on October 1, 2018, the “Bipartisan Budget Act of 2018” froze the market basket update at 2.4% prior to application of any penalty adjustment for failure to meet the requirements of the SNF QRP. This freeze could reduce Medicare reimbursements to SNFs which could have a material adverse effect on our operators’ financial condition and operations, adversely impacting their ability to meet their obligations to us.

Reimbursement methodology reforms, such as value-based purchasing, continue to be prevalent and attempt to hold providers accountable for the cost and quality of care provided by redistributing a portion of a provider or facility’s reimbursement based on the relative performance on designated economic, clinical quality, and patient satisfaction metrics. On April 27, 2018, CMS issued a proposed rule to replace the SNF PPS RUG-IV case-mix classification methodology with a new value-based Patient Driven Payment Model (“PDPM”). Under the PDPM, payments would be based on a resident’s objective classification group, and payment would be calculated by multiplying the case-mix index for the resident’s classification group to create a resident’s total per diem rate. The new payment system, if adopted as proposed, is expected to go into effect on October 1, 2019.

In addition to ~~FY 2018~~ Medicare payment rates, SNFs continue to be impacted by the “Bipartisan Budget Act of ~~2015” (“BBA”)~~2018,” which ~~provided $80 billion in discretionary spending sequestration relief over two years, and~~ extended Medicare sequestration ~~which generally~~and Medicare reimbursement cuts ~~Medicare provider~~to providers and ~~plan payments~~plans by 2% across the board, for an additional ~~year,~~two years through 2025. The FY 2025 sequestration will be “front loaded,” such that a 4% reduction will apply during the first six months of the fiscal year and no reduction will be imposed during the second half of the fiscal year.

2027.

Furthermore, ~~while the exceptions review process for therapy caps stipulated by MACRA expired December 31, 2017,~~ the Bipartisan Budget Act of 2018 permanently repealed the therapy caps ~~and the exceptions review process~~ that applied to Medicare Part B therapy ~~coverage~~services provided as of January 1, 2018. The former cap amounts were retained as a threshold above which claims must include confirmation that services are medically necessary as justified by appropriate documentation in the medical record. The industry estimates that these changes may potentially (i) result in the restoration of Medicare Part B SNF revenues that would have declined had the therapy caps remained in place and (ii) permit continued medically necessary services to maintain beneficiary quality of care levels. However, itthese changes reduced the reimbursement rate for Medicare Part B therapy services performed by therapy assistants to 85% of the physician fee schedule beginning January 1, 2022 which may offset some of the additional expenses. The Bipartisan Budget Act of 2018 also restored the limited post-pay claims review process and eliminated a threat to future SNF Medicare payment rates by ending the “Independent Payment Advisory Board” which was tasked with cutting future Medicare rates.2022.

Relatedly, CMS released a final rule on December 1, 2017 to significantly scale back mandatory participation in the bundled payment program for Lower Extremity Joint Replacement (“CJR”) procedures that went into effect on April 1, 2016, and was mandatory for all hospitals paid under the Medicare Inpatient Prospective Payment System that are located in the 67 selected metropolitan statistical areas (“MSAs”). Effective January 1, 2018, CJR program participation under the final rule is voluntary for the eligible hospitals in 33 of the MSAs currently covered by the program as of February 2018. The CJR program will remain mandatory in the 34 MSAs for the duration of the program, with an exception for certain low volume and rural hospitals. CMS anticipates the number of mandatory participating hospitals to decrease from approximately 700 under this rule. SNFs receiving Medicare revenues related to hospital discharges subject to CJR bundled payment programs in the identified geographic areas could be either positively or negatively affected by the CJR bundled payment program.

Quality of Care Initiatives. In addition to quality or value based reimbursement reforms, CMS has implemented a number of initiatives focused on the quality of care provided by long term care facilities that could affect our operators. In December 2008, CMS released quality ratings for all of the nursing homes that participate in Medicare or Medicaid under its “Five Star Quality Rating System.” Facility rankings, ranging from five stars (“much above average”) to one star (“much below average”) are updated on a monthly basis. SNFs are required to provide information for the CMS Nursing Home Compare website regarding staffing and quality measures. Based on this data and the results of state health inspections, SNFs are then rated based on the five-star rating system.

In August 2016, CMS announced a modification to the Five Star Quality Rating System through the introduction of new quality measures based primarily on Medicare claims data submitted by hospitals, including: (1) percentage of short-stay residents who were successfully discharged to the community; (2) percentage of short-stay residents who have had an outpatient emergency department visit; (3) percentage of short-stay residents who were re-hospitalized after a nursing home admission; (4) percentage of short-stay residents who made improvements in function; and (5) percentage of long-stay residents whose ability to move independently worsened. These ratings were incorporated into the nursing home rating system in July 2016 and were phased in through January 2017. In March 2019, CMS announced additional updates to the Nursing Home Care website and the Five Star Quality Rating System beginning in April 2019. These changes include revisions to the inspection process, enhancement of new staffing information, and implementation of new quality measures. Additional revisions include a lifting of the ‘freeze’ on the health inspection ratings instituted in February 2018. CMS has previously ‘frozen’ the health inspection star ratings category after implementing a new survey process for long-term care facilities.

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CMS is also setting higher thresholds and evidence-based standards for nursing homes’ staffing levels. Currently, facilities that report seven or more days in a quarter with no registered nurse onsite are automatically assigned a one-star staffing rating. In April 2019, the threshold for the number of days without a registered nurse onsite in a quarter that triggers an automatic downgrade to one-star will be reduced from seven days to four days. It is possible that ~~this~~these rating changes or any other ranking system could lead to future reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.

Office of the Inspector General Activities. Beginning June 15, 2017, the Office of Inspector General (“OIG”) began updating its Work Plan website monthly in order to enhance transparency around the OIG’s continuous work planning efforts. The OIG reported in its January 2018 update that it would review the quality of care provided to Medicare beneficiaries, including elders and disabled persons, who are being treated at inpatient and outpatient medical facilities for conditions that may be the result of abuse or neglect. The OIG referenced prior reviews which indicated problems with the quality of care and the reporting and investigation of potential abuse or neglect at group homes, nursing homes, and skilled nursing facilities. The OIG additionally included a review of the staffing levels reported by SNFs as part of its August 2018 and February 2019 updates, as well as a continuing review of involuntary transfers and discharges from nursing homes in its June 2019 updates. The OIG is continuing to review whether ambulance services paid by Medicare Part B were appropriately subject to Part A SNF consolidated billing requirements.

~~This review supplements~~These monthly Work Plan updates supplement the OIG’s Work Plan for government fiscal year 2017 that included seven projects related specifically to nursing homes: (1) determining to what extent ~~State~~state agencies investigate serious nursing home complaints within the required timeframes; (2) unreported incidents of potential abuse and neglect in SNFs; (3) review of SNF Medicare reimbursement documentation (determine if it meets requirements for each particular resource utilization group); (4) the SNF Adverse Event Screening Tool, which will disseminate practical information about the SNF Adverse Event Trigger Tool; (5) review of the National Background Check Program for long-term care employees; (6) compliance with the SNF prospective payment system requirement related to a three-day qualifying inpatient hospital stay; and (7) review of potentially avoidable hospitalizations of Medicare and Medicaid-Eligible nursing facility residents and prevention and detection services provided by nursing homes. Additionally, regional Recovery Audit Contractor program auditors along with the OIG and Department of Justice are expected to continue their efforts to evaluate SNF Medicare claims for any excessive therapy charges. In addition to the seven projects identified on the fiscal year 2017 Work Plan, subsequent updates indicate that the OIG would review whether ambulance services paid by Medicare Part B were subject to Part A SNF consolidated billing requirements. This review is ongoing.

Department of Justice. SNFs are under intense scrutiny for the quality of care being rendered to residents and appropriate billing practices. The Department of Justice launched ten regional Elder Justice Task Forces in 2016 which are coordinating and enhancing efforts to pursue SNFs that provide grossly substandard care to their residents. They are also focusing on therapy billing issues. These Task Forces are composed of representatives from the U.S. Attorneys’ Offices, State Medicaid Fraud Control Units, state and local prosecutors’ offices, U.S. Department of Health and Human Services (“HHS”), State Adult Protective Services agencies, Long Term Care Ombudsmen programs, and law enforcement.

Medicare and Medicaid Program Audits. Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the HHS-OIG and HHS-OCR, CMS and state Medicaid programs, may conduct audits of our operators’ billing practices. Under the Recovery Audit Contractor (“RAC”) program, CMS contracts with RACs on a contingency basis to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program, to managed Medicare plans and in the Medicaid program. CMS also employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. In addition to RACs and MICs, the state Medicaid agencies and other contractors have increased their review activities. Should any of our operators be found out of compliance with any of these laws, regulations or programs, our business, financial position and results of operations could be negatively impacted.

Fraud and Abuse. There are various federal and state civil and criminal laws and regulations governing a wide array of healthcare provider referrals, relationships and arrangements, including laws and regulations prohibiting fraud by healthcare providers. Many of these complex laws raise issues that have not been clearly interpreted by the relevant governmental authorities and courts.

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These laws include: (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs; (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid Anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, such as services provided in a SNF; (iii) federal and state physician self-referral laws (commonly referred to as the Stark Law), which generally prohibit referrals by physicians to entities for designated health services (some of which are provided in SNFs) with which the physician or an immediate family member has a financial relationship; (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information.

Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. Additionally, there are criminal provisions that prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, as well as failing to refund overpayments or improper payments. Violation of the Anti-kickback statute or Stark Law may form the basis for a federal False Claims Act violation. These laws are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or whistleblower actions, which have become more frequent in recent years.

Several of our operators have responded to subpoenas and other requests for information regarding their operations in connection with inquiries by the ~~U.S.~~ Department of Justice or other regulatory agencies. In addition, MedEquities Realty Trust, Inc., which we acquired in May 2019, has responded to a Civil Investigative Demand from the Department of Justice in connection with Lakeway Regional Medical Center. See Note 16 – Commitments and Contingencies in the Financial Statements - Part I, Item 1 hereto.

Privacy. Our operators are subject to various federal, state and local laws and regulations designed to protect the confidentiality and security of patient health information, including the federal Health Insurance Portability and Accountability Act of 1996, as amended, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and the corresponding regulations promulgated thereunder (collectively referred to herein as “HIPAA”). The HITECH Act expanded the scope of these provisions by mandating individual notification in instances of breaches of protected health information, providing enhanced penalties for HIPAA violations, and granting enforcement authority to states’ Attorneys General in addition to the HHS Office for Civil ~~Rights.~~Rights (“OCR”). Additionally, in a final rule issued in January 2013, HHS ~~continued its auditing program~~modified the standard for determining whether a breach has occurred by creating a presumption that any non-permitted acquisition, access, use or disclosure of protected health information is a breach unless the covered entity or business associate can demonstrate through a risk assessment that there is a low probability that the information has been compromised. The OCR received $28.7 million from enforcement actions in 2018, surpassing the previous record of $23.5 million from 2016 ~~to assess compliance efforts~~ by covered entities and business associates. Through a second phase of audits, which commenced for covered entities in July 2016, HHS focused on a review of policies and procedures adopted and employed by covered entities and their business associates to meet selected standards and implementation specifications of the HIPAA Privacy, Security, and Breach Notification Rules. Covered entities and business associates selected for a desk audit have the potential to be selected for an on-site audit. The HHS Office for Civil Rights reported that as of September 2017, desk audits of covered entities were completed and desk audits of business associates were ongoing.

22 percent.

Various states have similar laws and regulations that govern the maintenance and safeguarding of patient records, charts and other information generated in connection with the provision of professional medical services. These laws and regulations require our operators to expend the requisite resources to secure protected health information, including the funding of costs associated with technology upgrades. Operators found in violation of HIPAA or any other privacy law or regulation may face ~~large~~significant monetary penalties. In addition, compliance with an operator’s notification requirements in the event of a breach of unsecured protected health information could cause reputational harm to an operator’s business.

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Licensing and Certification. Our operators and facilities are subject to various federal, state and local licensing and certification laws and regulations, including laws and regulations under Medicare and Medicaid requiring operators of SNFs and ALFs to comply with extensive standards governing operations. Governmental agencies administering these laws and regulations regularly inspect our operators’ facilities and investigate complaints. Our operators and their managers receive notices of observed violations and deficiencies from time to time, and sanctions have been imposed from time to time on facilities operated by them. In addition, many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain healthcare facilities, which has the potential to impact some of our operators’ abilities to expand or change their businesses.

Americans with Disabilities Act (the “ADA”). Our properties must comply with the ADA and any similar state or local laws to the extent that such properties are public accommodations as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Should barriers to access by persons with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. Our commitment to make readily achievable accommodations pursuant to the ADA is ongoing, and we continue to assess our properties and make modifications as appropriate in this respect.

Other Laws and Regulations. Additional federal, state and local laws and regulations affect how our operators conduct their operations, including laws and regulations protecting consumers against deceptive practices and otherwise generally affecting our operators’ management of their property and equipment and the conduct of their operations (including laws and regulations involving fire, health and safety; quality of services, including care and food service; residents’ rights, including abuse and neglect laws; and the health standards set by the federal Occupational Safety and Health Administration).

General and Professional Liability.Although arbitration agreements have been effective in limiting general and professional liabilities for SNF and long term care providers, there have been numerous lawsuits challenging the validity of arbitration agreements in long term care settings. As set forth in the recent conditions of participation final rule issued on October 4, 2016, CMS prohibited pre-dispute arbitration agreements between SNFs and residents effective November 28, 2016, thereby increasing potential liabilities for SNFs and long-term care providers. Subsequently, the authority of CMS to restrict the rights of these parties to arbitrate was challenged by litigation in various jurisdictions, and enforcement by CMS was suspended on November 7, 2016 following the issuance of a preliminary injunction by the U.S. District Court for the Northern District of Mississippi. In a reversal from its previous position, CMS issued a proposed rule on June 5, 2017 that ~~lifts CMS’~~would lift the ban on pre-dispute arbitration agreements in the long-term care setting. The ~~proposed~~final rule ~~continues~~issued by CMS on July 16, 2019 lifted the ban on pre-dispute arbitration agreements offered to ~~face challenges by certain industry groups.~~residents at the time of admission, but prohibits providers from requiring residents to sign them as a condition for receiving care. The final rule also mandates that providers specifically inform residents or their representatives that they are not required to agree to a binding arbitration agreement. Further, the agreement must specifically grant residents the explicit right to rescind the agreement within thirty (30) calendar days of signing it.

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Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States, and a summary of our significant accounting policies is included in “Note 2 – Summary of Significant Accounting Policies” to our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. Our preparation of the financial statements requires us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and accompanying footnotes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the consolidated financial statements. We have described our most critical accounting policies in our ~~2017~~2018 Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~”.

Operations.

There have been no changes to our critical accounting policies or estimates since December 31, ~~2017.~~2018, except for the changes that resulted from the adoption of the new lease accounting standard on January 1, 2019, as discussed in detail in Note 1 – Basis of Presentation and Significant Accounting Policies, section “Accounting Pronouncements Adopted in 2019” of these unaudited consolidated financial statements under Part 1, Item 1 of this report and the accompanying discussion of the new lease accounting guidance below. See also Note 2 – Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Accounting Pronouncements Adopted in ~~2018~~

2019

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As a ~~result~~lessor, rental income from operating leases is generally recognized on a straight-line basis over the lease term when we have determined that the collectibility of ~~adopting~~substantially all of the ~~standard,~~lease payments is probable. If we determine that it is not probable that substantially all of the ~~Company is making certain adjustments to its existing hedge designation documentation~~lease payments will be collected, we account for ~~active hedging relationships in order to take advantage of specific provisions~~the revenue under the lease on a cash basis. Changes in the ~~new guidance and~~assessment of probability are accounted for on a cumulative basis as if the lease had always been accounted for based on the current determination of the likelihood of collection potentially resulting in increased volatility of rental revenue.

In addition, provisions for operating lease losses are recognized as a direct reduction to ~~fully align its documentation with ASU 2017-12. The adoption of ASU 2017-12 did not have a material impact~~rental income. Provisions for operating lease losses prior to January 1, 2019 were recorded in provision for uncollectible accounts on our Consolidated Statements of Operations and were not reclassified to conform to the current period presentation. See Note 1 – Basis of Presentation and Significant Accounting Policies, section “Accounting Pronouncements Adopted in 2019” of these unaudited consolidated financial ~~statements.~~statements under Part 1, Item 1 of this report for additional disclosures.

Recent Accounting Pronouncements - Pending Adoption

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic ~~326~~)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 credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for annual and interim periods beginning after December 15, ~~2019 and early adoption is permitted~~2019. ASU 2016-13 specifically excludes from its scope receivables arising from operating leases accounted for ~~annual and interim periods beginning after December 15, 2018.~~under Topic 842. We ~~are~~ currently ~~evaluating~~expect to adopt the standard using the modified retrospective approach. We continue to evaluate the impact of adopting ASU 2016-13 on our consolidated financial statements.

Results of Operations

The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes.

Three Months Ended June 30, ~~2018~~2019 and ~~2017~~2018

Operating Revenues

Our operating revenues for the three months ended June 30, ~~2018~~2019 totaled ~~$219.9~~$225.3 million, ~~a decrease~~an increase of ~~$15.9~~$5.4 million over the same period in ~~2017.~~2018. The ~~$15.9~~$5.4 million ~~decrease~~increase was primarily the result of (i) a ~~$15.0~~$12.2 million increase in rental income resulting from the MedEquities Merger, additional revenue from facility acquisitions, facility transitions and lease amendments in 2018 and 2019, and $2.8 million of property tax revenue resulting from the adoption of ASU 2016-02 on January 1, 2019, offset by an approximate $13.0 million decrease due to facility sales and placing operators on a cash basis and (ii) a $2.0 million increase in mortgage income and a $2.0 million increase in other investment income primarily related to the MedEquities Merger and new loans or notes and additional funding to existing operators made throughout 2018 and 2019. These increases were partially offset by (i) a $0.4 million decrease in miscellaneous income and (ii) a $0.2 million decrease in the direct financing lease income related to ~~New Ark Investment Inc. (“New Ark” which does business as “Orianna Health Systems” and is herein referred to as “Orianna”), (ii) $1.1 million decrease in rental income resulting from~~a facility ~~sales and placing three leases on cash basis, offset by additional revenue from facility acquisitions, facility transitions and lease amendments and (iii) a~~ $~~2.2 million decrease in miscellaneous income primarily related to the reversal of operator earn-outs~~sale in the second quarter of ~~2017 and fewer late fees in~~ 2018. ~~These decreases were offset by a $1.8 million increase in other investment income primarily related to new notes and additional funding to existing operators made throughout 2017 and 2018.~~

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Operating Expenses

Operating expenses for the three months ended June 30, ~~2018,~~2019, totaled ~~$84.3~~$98.5 million, ~~a decrease~~an increase of approximately ~~$10.4~~$14.2 million over the same period in ~~2017.~~2018. The ~~$10.4~~$14.2 million ~~decrease~~increase was primarily due to: (i) ~~$4.1~~$5.7 million ~~of impairments~~net impairment charges on ~~nine~~two facilities in the second quarter of ~~2018, offset by $5.2 million of insurance proceeds received related to a facility destroyed in November 2017,~~2019, as compared to ~~$10.1~~a $(1.1) million recovery on impairment of ~~impairments on six facilities~~real estate properties in the same period of ~~2017,~~2018, (ii) a ~~$2.1~~$4.0 million increase in depreciation expense primarily resulting from the MedEquities Merger and facility acquisitions, (iii) a $4.0 million increase related to real estate tax expense resulting from the adoption of ASU 2016-02 on January 1, 2019 and (iv) a $1.2 million increase in acquisition costs primarily related to the MedEquities Merger. These increases were partially offset by (i) a $1.4 million decrease in general and administrative expenses and (ii) a $0.6 million decrease in provisions for uncollectible accounts and (iii) a $0.7 million decrease in depreciation and amortization expense, primarily resulting from facilities reclassified to held for sale and facility sales. The decreases were partially offset by a $3.7 million increase in general and administrative expenses.accounts.

Other Income (Expense)

For the three months ended June 30, ~~2018,~~2019, total other expenses were ~~$49.3~~$51.0 million, ~~a decrease~~an increase of approximately ~~$23.0~~$1.7 million over the same period in ~~2017.~~2018. The ~~decrease~~increase was due to $1.3 million change in interest income and other – net primarily related to ~~a $22.0 million decrease in interest - refinance costs related to~~ the ~~redemption of the $400 million 5.875% senior notes and the restructuring of the credit facility~~change in the ~~second quarter~~fair value of ~~2017.~~warrants to acquire shares of another public company.

Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018

Operating Revenues

Our operating revenues for the six months ended June 30, ~~2018~~2019 totaled ~~$440.1~~$449.0 million, ~~a decrease~~an increase of ~~$27.5~~$8.9 million over the same period in ~~2017.~~2018. The ~~$27.5~~$8.9 million ~~decrease~~increase was primarily the result of ~~(i)~~ a ~~$30.0~~$5.4 million increase in other investment income and a $3.6 million increase in mortgage income. These increases primarily related to MedEquities Merger, new loans or notes and additional funding to existing operators made throughout 2018 and 2019. These increases were partially offset by a $0.6 million decrease in the direct financing lease income related to ~~Orianna and (ii)~~ a $~~2.3 million decrease in miscellaneous income primarily related to the reversal of operator earn-outs~~ facility sale in the second quarter of ~~2017 and fewer late fees in~~ 2018. The decrease was offset by: (i) a $3.4 million increase in other investment income primarily related to new notes and additional funding to existing operators made throughout 2017 and 2018, (ii) a $1.2 million increase in mortgage interest income primarily related to additional funding on mortgages to an existing operator, partially offset by mortgage loan payoffs and (iii) a $0.3 million increase in rental income related to acquisitions, transitions, and lease amendments made throughout 2017 and 2018, offset by the loss of rental income from facility sales and operators placed on a cash basis due to future collectability concerns.

Operating Expenses

Operating expenses for the six months ended June 30, ~~2018,~~2019, totaled ~~$183.9~~$200.0 million, ~~a decrease~~an increase of approximately ~~$3.4~~$16.1 million over the same period in ~~2017.~~2018. The ~~$3.4~~$16.1 million ~~decrease~~increase was primarily due to: (i) a $7.9 million increase related to real estate tax expense resulting from the adoption of ASU 2016-02 on January 1, 2019, (ii) a ~~$14.0~~$7.7 million ~~decrease~~increase in impairment loss on direct financing leases due to lower than expected accounts receivable collections by the Orianna Health Systems (“Orianna”) bankruptcy trustee, (iii) a $4.5 million increase in depreciation expense primarily resulting from the MedEquities Merger and facility acquisitions, (iv) a $4.2 million increase in acquisition costs related to the MedEquities Merger and (v) a $1.9 million increase in impairment on real estate ~~properties,~~properties. These increases were partially offset by (i) a ~~$7.6~~$8.4 million increase in general and administrative expenses resulting from higher professional service fees resulting from operator restructurings and a $2.0 million buyout of an in-the-money purchase option to an unrelated third-party and (ii) a $3.3 million increasedecrease in provisions for uncollectible accounts ~~related to the reserve and/or write-off of contractual receivables~~ and ~~straight-line receivables.~~(ii) a $1.7 million decrease in general and administrative expenses.

Other Income (Expense)

For the six months ended June 30, ~~2018,~~2019, total other expenses were ~~$98.9~~$101.0 million, ~~a decrease~~an increase of approximately ~~$10.5~~$2.1 million over the same period in ~~2017.~~2018. The ~~decrease~~increase was due to $1.6 million change in interest income and other – net primarily related to ~~a $22.0 million decrease in interest - refinance costs related to~~ the ~~redemption of the $400 million 5.875% senior notes and the restructuring of the credit facility~~change in the ~~second quarter~~fair value of ~~2017, offset by (i) a $10.4 million favorable contractual settlement with an unrelated third-party related~~warrants to ~~a contingent liability obligation that originated in 2012 and was resolved in the first quarter~~acquire shares of ~~2017 and (ii) a $3.0 million increase in interest expense related to higher debt balances outstanding to fund new investments and higher blended borrowing costs.~~another public company.

National Association of Real Estate Investment Trusts Funds From Operations

Our funds from operations (“~~NAREIT~~Nareit FFO”) for the three months ended June 30, ~~2018~~2019 was ~~$155.5~~$157.2 million compared to ~~$150.9~~$154.5 million for the same period in ~~2017.~~2018. Our ~~NAREIT~~Nareit FFO for the six months ended June 30, ~~2018~~2019 was ~~$303.5~~$301.3 million compared to ~~$331.9~~$301.9 million for the same period in ~~2017.~~2018.

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We calculate and report ~~NAREIT~~Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“~~NAREIT”~~Nareit”), and, consequently, ~~NAREIT~~Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ~~ventures.~~ventures and changes in the fair value of warrants. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. We believe that ~~NAREIT~~Nareit FFO is an important supplemental measure of our operating performance. Because the historical cost accounting convention used for real estate assets requires depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time, while real estate values instead have historically risen or fallen with market conditions. ~~NAREIT~~Nareit FFO was designed by the real estate industry to address this issue. ~~NAREIT~~Nareit FFO herein is not necessarily comparable to ~~NAREIT~~Nareit FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.

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

The following table presents our ~~NAREIT~~Nareit FFO results for the three and six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:

Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
(in thousands)

Net income $ 81,986 $ 68,157 $ 169,919 $ 177,269
Add back loss (deduct gain) from real estate dispositions 2,891 622 (14,609 ) (6,798 )
Add back loss from real estate dispositions - unconsolidated joint venture 640 - 640 -
85,517 68,779 155,950 170,471
Elimination of non-cash items included in net income:
Depreciation and amortization 69,609 70,350 139,970 140,343
Depreciation – unconsolidated joint venture 1,466 1,658 3,123 3,316
(Deduct) add back (recovery) impairments on real estate properties (1,097 ) 10,135 3,817 17,773
Add back impairments on real estate properties - unconsolidated joint venture - - 608 -
NAREIT FFO^(a) $ 155,495 $ 150,922 $ 303,468 $ 331,903


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands)
Net income	$	75,671	$	81,986	$	147,853	$	169,919
Add back loss (deduct gain) from real estate dispositions		267		2,891		264		(14,609)
Add back loss from real estate dispositions - unconsolidated joint ventures		—		640		—		640
		75,938		85,517		148,117		155,950
Elimination of non-cash items included in net income:
Depreciation and amortization		73,637		69,609		144,489		139,970
Depreciation – unconsolidated joint ventures		1,675		1,466		3,047		3,123
Add back (deduct) impairments (recovery) on real estate properties		5,709		(1,097)		5,709		3,817
Add back impairments on real estate properties - unconsolidated joint ventures		—		—		—		608
Add back (deduct) unrealized loss (gain) on warrants		270		(1,021)		(14)		(1,602)
Nareit FFO ^(a)	$	157,229	$	154,474	$	301,348	$	301,866

(a)

^(a)

Includes amounts allocated to Omega stockholders and Omega OP Unit holders.

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Portfolio and Recent Developments

The following ~~table summarizes~~tables summarized the significant acquisitions that occurred during the first six months of ~~2018:~~2019:



	Number of						Total					Building & Site		Furniture	Initial
	Facilities				Country/	Investment				Land		Improvements		& Fixtures	Annual
Period	SNF	ALF	Specialty	MOB	State		(in millions)								Cash Yield⁽¹⁾
Q1	1	—	—	—	OH	$	11.9	⁽³⁾	$	1.1	$	10.1	$	0.7	12.00	%
Q2	20	1	11	1	CA, CT, IN, NV, SC, TN, TX		421.4	⁽²⁾		40.1		368.7		12.6	10.27	%
Q2	7	1	3	—	PA, VA		131.8	⁽³⁾		9.9		112.7		9.2	9.35	%
Total	28	2	14	1		$	565.1		$	51.1	$	491.5	$	22.5

⁽¹⁾

~~Omega recorded a non-cash deferred tax liability of approximately $0.4 million in connection with the acquisition.~~

⁽²⁾

~~Omega recorded a non-cash deferred tax liability of approximately $0.2 million in connection with the acquisition.~~

⁽³⁾

The cash yield is based on the purchase price.

(2)

(3)

Acquired via a deed-in-lieu of foreclosure.

On May 17, 2019, Omega and Omega OP completed the MedEquities Realty Trust Inc. (“MedEquities”) Merger. In accordance with the Merger Agreement, each share of MedEquities common stock issued and outstanding immediately prior thereto was converted into the right to receive (i) 0.235 of a share of Omega common stock plus the right to receive cash in lieu of any fractional shares of Omega common stock, and (ii) an amount in cash equal to $2.00 (the “Cash Consideration”). In connection with the MedEquities Merger, we issued approximately 7.5 million shares of Omega common stock and paid approximately $63.7 million of cash consideration to former MedEquities stockholders. We borrowed approximately $350 million under our existing senior unsecured revolving credit facility to fund the cash consideration and the repayment of MedEquities’ previously outstanding debt. As a result of the MedEquities Merger, we acquired 33 facilities subject to operating leases, four mortgages, three other investments and an investment in an unconsolidated joint venture. We also acquired other assets and assumed debt and other liabilities. Based on the closing price of our common stock on May 16, 2019, the fair value of the consideration exchanged approximated $346 million.

The following table highlights the preliminary fair value of the assets acquired and liabilities assumed on May 17, 2019:


	(in thousands)
Fair value of net assets acquired:
Real estate investments	$	421,448
Mortgage notes receivable (see Note 7)		108,097
Other investments		19,192
Investment in unconsolidated joint venture		73,907
Cash		4,067
Contractual receivables		1,461
Other assets ⁽¹⁾		32,819
Total investments		660,991
Debt		(285,100)
Accrued expenses and other liabilities ⁽²⁾		(30,342)
Fair value of net assets acquired	$	345,549

(1)Includes approximately $26.8 million in above market lease assets.

(2)Includes approximately $7.5 million in below market lease liabilities.

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For the three and six months ended June 30, ~~2018,~~2019, we incurred approximately $1.2 million and $4.2 million, respectively, of acquisition related costs associated with the MedEquities Merger.

Investment in Consolidated Joint Venture

Investment in Unconsolidated Joint Venture

On May 17, 2019, in connection with the MedEquities Merger, we acquired ~~two parcels of land (not reflected~~a 51% ownership interest in Lakeway Realty, L.L.C. (the “Lakeway Partnership”), a joint venture that owns the ~~table above) for approximately $3.5 million with the intent of building new facilities for our existing operators.~~

~~In June 2018, we amended our original $415.0 million mortgage with Ciena Healthcare (“Ciena”~~Lakeway Regional Medical Center (the “Lakeway Hospital”) ~~with the addition of~~. The other 49% interest is owned indirectly by a ~~$44.7 million mortgage note related to five SNFs~~physicians group and a non-physician investor. The Lakeway Hospital is an acute care hospital located in ~~Michigan.~~Lakeway, Texas. The ~~mortgage note matures on June 30, 2029 and bears an initial annual interest rate of 9.5%~~Lakeway Partnership is also a lessor under a ground lease for a medical office building 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.~~

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,~~Lakeway Hospital campus. On the merger date, the Company’s ownership interest in the Lakeway Partnership had a preliminary fair value of approximately $73.9 million (subject to the completion of our purchase accounting). Our investment in the Lakeway Partnership consists primarily of real estate. We estimated the fair value of the underlying real estate considering the lessees’ purchase option (Level 1) which is discussed in more detail below, third-party appraisals and discounted cash flows associated with the ground lease (Level 3). Our preliminary initial basis difference of approximately $69.9 million is amortized on a straight-line basis over 40 years to income (loss) from unconsolidated joint ventures in the accompanying Consolidated Statements of Operations. We account for our investment in this joint venture using the equity method. The accounting policies for this unconsolidated joint venture are the same as those of the Company.

Other Development

On July 26, 2019, the Company ~~increased~~entered into an agreement to purchase 60 facilities for $735 million consisting of approximately $345 million of cash and the ~~mezzanine loan~~assumption of approximately $390 million (as of August 1, 2019) in mortgage loans guaranteed by ~~$10.0~~the U.S. Department of Housing and Urban Development (“HUD”). These loans have a blended “all-in” rate (including Mortgage Insurance Premiums) of 3.66% per annum with maturities between September 2046 and December 2051.

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The 60 facilities consist of 58 SNFs and two ALFs representing 6,590 operating beds, located in eight states and are leased to two operators in three triple net leases generating approximately $64 million ~~extended~~in 2020 annual contractual cash rent.

Completion of the ~~maturity date~~transaction is subject to ~~May 31, 2023~~consent by HUD as well as the satisfaction of customary closing conditions. No assurance can be given as to when or if (i) HUD’s consent will be obtained, (ii) the closing conditions will be satisfied and ~~fixed~~(iii) 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.acquisition will be completed.

Asset Held for Sale

As of June 30, ~~2018,~~2019, we have ~~three~~four facilities, totaling ~~$3.8~~$4.6 million classified as assets held for sale. We expect to sell these facilities over the next twelve months.

Asset Sales, Impairments, ~~Accounts Receivable~~Contractual Receivables and Other Receivables and Lease Inducements and Other

Asset Sales

$3,000.

During the second quarter of ~~2018,~~2019, we sold 45three facilities ~~and one ancillary building (33 of which were previously held for sale at March 31, 2018)~~ subject to operating leases and a parcel of land for approximately ~~$147.2~~$8.6 million in net cash proceeds recognizing a net loss ~~on sale~~ of approximately ~~$2.9~~$0.3 million.

~~Of the 45 facilities sold during~~During the second quarter of ~~2018, we sold 12 SNFs on June 1, 2018 (12~~2019, the Company reached an agreement with Diversicare Healthcare Services, Inc. to amend its master lease to terminate operations of ~~which were previously held for sale at March 31, 2018) secured by HUD mortgages to subsidiaries of an existing operator. The Company sold~~ten nursing facilities located in Kentucky. We will concurrently sell 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. 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 bearing interest at 6% per annum and maturing on May 31, 2021. Commencing October 1, 2018 and the first day of each subsequent quarter, the unsecured 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.

~~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~~third party for approximately ~~$15.4~~$84.5 million. The transaction is subject to closing conditions, including but not limited to, state licensure and regulatory approval. The transaction is expected to become effective in the third quarter of 2019; however, no assurance can be given as to when or if the closing conditions are satisfied and the sale completed.

Impairments

During the ~~first~~second quarter of ~~2018,~~2019, we recorded impairments on real estate properties of approximately ~~$4.9~~$7.6 million on ~~17 facilities (16 of which were subsequently reclassified to assets held for sale).~~

~~During the~~two facilities. Our second quarter ~~of 2018, we recorded impairments of approximately $4.1 million on nine facilities (three of which were subsequently reclassified to assets held for sale). Our~~2019 impairments were offset by ~~$5.2~~$1.9 million of insurance proceeds received related to a facility that was destroyed ~~in November 2017.~~by a storm.

~~Accounts Receivable~~

Contractual Receivables and Other Receivables and Lease Inducements

As of June 30, ~~2018,~~2019, we have approximately ~~$32.7~~$25.9 million of contractual receivables outstanding. Of the $25.9 million of contractual receivables outstanding, ~~– net of allowances. Of the $32.7 million of contractual receivables outstanding – net of allowances,~~ approximately ~~$20.8~~$18.1 million relates to ~~Orianna,~~ Agemo Holdings LLC (“Agemo” an entity formed in May 2018 to silo the leases and loans formerly held by Signature Healthcare)~~, and~~. In addition to the contractual receivables, we have approximately $45.1 million of straight-line rent receivables and/or lease inducements associated with Agemo as of June 30, 2019. Daybreak Venture LLC (“Daybreak”)~~. Orianna and Daybreak are~~ is on a cash basis of accounting for purposes of revenue recognition, see additional discussion below. ~~In addition to the contractual receivables, we have approximately $36.1 million of straight-line rent receivables and/or lease inducements associated with these operators as of June 30, 2018.~~ For the three months ended June 30, 2019 and 2018, we recorded approximately $21.3 million and $22.9 million of rental income, respectively, and $1.1 million and $0.8 million, respectively, of other investment income from these operators. For the six months ended June 30, 2019 and 2018, we recorded approximately ~~$22.9~~$41.5 million and $42.2 million of rental income, respectively, ~~$2.0~~and $2.1 million and ~~$3.2~~$1.5 million, respectively, of other investment income ~~and no income~~ from ~~direct financing leases for~~ these operators.

~~Other~~

~~Orianna has not satisfied the contractual payments due under the terms~~Table 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.~~Contents

Other

On January 11, 2019, pursuant to a 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~~order, affiliates 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 ofOrianna purchased the remaining ~~19 facilities.~~

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. While the form of resolution with 4 West Holdings and the sponsor of Orianna’s restructuring plan is evolving, we remain confident that the final resolution will ultimately result in our previously stated range of $32 million to $3815 SNFs for $176 million of ~~annual rent or rent equivalents from the assets that previously constituted our~~consideration, comprised of $146 million in cash received by Orianna ~~portfolio. 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~~and a $30.0 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.~~

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 approvedseller note held by the ~~Bankruptcy Court on an interim basis on March 9, 2018 and on a final basis on May 14, 2018.~~Company. The ~~DIP financing consists of a $14.2~~$30.0 million term loan and a $15.8 million revolving credit facility which are 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 loannote bears interest at ~~1-month LIBOR plus 5.5%~~6% per annum and matures on ~~September 30, 2018. Orianna has borrowed~~January 11, 2026. Interest on the ~~full amount~~unpaid principal balance is due quarterly in arrears. Commencing on January 11, 2022, quarterly principal payments are due based on a 15-year amortization schedule on the then outstanding principal balance of the ~~term loan~~loan. On the same date, Orianna repaid the debtor-in-possession (“DIP”) financing, including all related interest.

On January 16, 2019, the Bankruptcy Court confirmed Orianna’s plan, creating a Distribution Trust (the “Trust”) to ~~repay their previous secured working capital lender.~~distribute the proceeds from Orianna’s sale of the remaining 15 SNFs, as well as the Trust’s collections of Orianna’s accounts receivable portfolio. In January 2019, we reclassified our net investment in direct financing lease of $115.8 million from the Trust to other assets on our Consolidated Balance Sheet. For the period from January 16, 2019 through June 30, 2019, we received approximately $88 million from the Trust as a partial liquidation including approximately $2.0 million during the three months ended June 30, 2019.

In March 2019, we received updated information from the Trust indicating diminished collectability of the accounts receivable owed to us. As a result, we recorded an additional $7.7 million allowance during the three months ended March 31, 2019, reducing our remaining receivable from the Trust to approximately $21.1 million as of March 31, 2019. As of June 30, ~~2018, approximately $14.2 million~~2019, our remaining receivable from the Trust 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.$19.1 million. As of June 30, ~~2018, approximately $10.5~~2019, the Trust was comprised of $20.7 million ~~is outstanding on this revolving credit facility.~~

~~In May 2017, we provided Orianna~~of cash and accounts receivable, net of an ~~$18.8 million maximum borrowing secured revolving working capital loan~~estimated allowance, of $4.2 million. We expect that ~~bears interest at 9% per annum (with one-half (1/2)~~the aggregate of ~~all accrued interest to~~such amounts will 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 order approving the DIP financing, Orianna is obligatedused to pay ~~one-half (1/2)~~estimated costs of ~~all accrued post-bankruptcy interest~~$5.9 million to other creditors and to wind down the Trust, with the remainder paid to us. The amount payable ~~on this revolving working capital loan at~~to us is contingent upon the ~~default rate. As of June 30, 2018, our total other investments outstanding with Orianna approximate $40.0 million.~~

~~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~~collection of the ~~U.S. The amount of~~accounts receivable balances and the ~~allowance was determined based on~~estimated costs to wind down the ~~fair value of the facilities~~Trust. These amounts are estimated and remain 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.change. Such changes could be ~~significantly~~ different than the currently estimated ~~fair value~~amounts and such differences could have a material impact on our financial statements.

The 38 facilities remaining under our direct financing 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. 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.

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 May 7, 2018, Omega and Signature Healthcare entered into a consensual, out-of-court restructuring agreement. The restructuring involves multiple third-party constituents, including other third-party landlords, a new working capital lender, medical malpractice claimants, and other third-party interests. As part of the restructuring, Signature Healthcare was reorganized to separate each of its primary portfolios with its major landlords into three distinct lease silos and separate virtually all other legal obligations. As part of this restructuring, Signature Healthcare formed Agemo Holdings LLC (“Agemo”) to be the holding company of the lessees and loans of the Omega portfolio, and for which Omega agreed to:

~~defer up to $6.3 million of rent per annum for 3 years commencing May 1, 2018;~~

~~provide capital expenditure funds to be used for the general maintenance and capital improvements of our 59 facilities in the amount of approximately $4.5 million per year for 3 years;~~

~~extend a 7-year working capital term loan at 7% for an amount up to $25 million with a maturity date of April 30, 2025 ($10.0 million is outstanding as of June 30, 2018);~~

~~extend the term of the master lease by two years to December 31, 2030 and;~~

~~extend the maturity date of the existing term loan by two years to December 31, 2024.~~

As part of the restructuring, Signature Healthcare entered into new working capital credit facilities with its new working capital lender for each of its separate silos, including Agemo. In addition, as part of our restructure, certain third-party guarantors of the Agemo master lease were required to contribute approximately $7.8 million in funds to the enterprise to be used to reduce the outstanding contractual receivables owed to Omega from Agemo. On May 8, 2018, the Company received $5.0 million in cash from the guarantors and a one-year term note from the principals of Agemo for approximately $2.8 million.

During the third quarter of 2017, we placed Daybreak on a cash basis for revenue recognition as a result of ~~nonpayment.~~nonpayment of funds owed to us. During the fourth quarter of 2017, we executed a Settlement and Forbearance Agreement with Daybreak which permitted Daybreak to defer payments up to 23% of their contractual rent for the remainder of 2017, subject to certain conditions. During the fourth quarter of 2018, Daybreak fell behind on rent ~~returned to~~by approximately two months and, accordingly, was no longer in compliance with the 2017 Settlement and Forbearance Agreement as a result of not paying the full contractual ~~amount~~amounts due.

On January 30, 2019, we entered into a Second Amendment to Settlement and Forbearance Agreement under which we agreed to defer approximately $4.2 million of rent in the fourth quarter of 2018 and approximately $2.5 million (or approximately one month’s rent) in each of the first two quarters of 2019. With the exception of $1.1 million in required real estate tax escrows, Daybreak met their contractual payment obligations through the second quarter of 2019. However, continued pressures on overall occupancy, Medicare census, labor costs and a low Medicaid rate in the state of Texas have resulted in tighter liquidity for Daybreak.

Confronted with these challenges, we recently engaged a third party consultant to provide a comprehensive review of Daybreak’s overall operations, provide commentary and recommendations for improvement opportunities, and provide a long range forecast of Daybreak’s future cash flow expectations. While the results of our consultants’ findings are not yet final, we have reduced our expectations for future quarterly cash rent receipts from Daybreak for the foreseeable future.

It is important to point out that this remains a work-in-progress and does not reflect our long-term view as to the intrinsic value of the Daybreak portfolio and its ability to generate cash flow and rent to the Company.

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While many of our Texas operators are challenged by Texas’ low Medicaid rate and the continued labor pressures, Daybreak is further challenged by their widespread geographical footprint across the state, its lack of a presence in other states with more favorable reimbursement and their concentration in rural localities which results in a limited Medicare/Medicaid quality-mix and lower occupancy. While the third quarter of 2019 is expected to be particularly challenging for Daybreak, we expect that ~~past due rent~~Daybreak will benefit from several known factors in the fourth quarter, including, (i) the addition of 26 Omega facilities into the Texas quality incentive payment program (“QIPP”), (ii) the implementation of PDPM and (iii) the 2.4% Medicare rate increase. The QIPP benefit will begin ~~to be repaid in~~on September 1, 2019 and PDPM and the ~~latter part of 2018.~~Medicare rate increase will begin on October 1, 2019.

The Company continues to closely monitor the performance of all of its operators, as well as industry trends and developments generally.

Liquidity and Capital Resources

At June 30, ~~2018,~~2019, we had total assets of ~~$8.6~~$9.1 billion, total equity of ~~$3.9~~$4.1 billion and debt of ~~$4.4~~$4.8 billion, representing approximately ~~53.6%~~54.1% of total capitalization.

Financing Activities and Borrowing Arrangements

~~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~~the MedEquities Merger on May 17, 2019, we assumed a $125.0 million term loan and outstanding borrowings of $160.1 million under MedEquities’ previous revolving credit facility. We repaid the ~~mortgages we wrote-off approximately $0.6 million of unamortized deferred costs that are recorded in (Loss) gain~~total outstanding balance on ~~assets sold – net~~both the term loan and the revolving credit facility and terminated the related agreements 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.~~May 17, 2019.

$500 Million Equity Shelf Program

For the three months ended June 30, 2019 and 2018, we issued 0.7 million and 0.9 million, respectively, shares of our common stock at an average price of $35.90 and $30.19 per share, respectively, net of issuance costs, generating net proceeds of $26.3 million and $27.5 million, respectively, under our $500 million Equity Shelf Program. For the six months ended June 30, 2019 and 2018, we issued 3.0 million and 0.9 million, respectively, shares of our common stock at an average price of $34.82 and $30.16 per share, respectively, net of issuance costs, generating net proceeds of $102.9 million and $27.5 million, respectively, under our $500 million Equity Shelf Program.

Dividend Reinvestment and Common Stock Purchase Plan

For the three months ended June 30, 2019 and 2018, we issued approximately 0.6 million and 0.8 million, respectively, shares of our common stock at an average price of $37.02 and $29.22 per share, ~~were issued~~respectively, per share through our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $21.8 million and $22.2 ~~million.~~million, respectively. For the six months ended June 30, 2019 and 2018, we issued approximately 1.5 million and 0.9 million, respectively, shares of our common stock at an average price of $36.52 and $28.55 per share, ~~were issued~~respectively, per share through our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $54.1 million and $27.1 ~~million.~~million, respectively.

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Dividends

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

For the ~~three and~~ six months ended June 30, ~~2018,~~2019, we paid dividends of approximately ~~$131.6 million and $263.0~~$273.8 million, to our common stockholders. On the 15^th of February and May 2019, we paid dividends of $0.66 per outstanding common share to common stockholders of record as of last business day of January and April 2019, respectively. For the six months ended June 30, 2019, Omega OP paid distributions of approximately $12.1 million to holders of Omega OP Units other than Omega. The Omega OP Unit holders received the same distributions per unit as those paid to the common stockholders of Omega.

Liquidity

We believe our liquidity and various sources of available capital, including cash from operations, our existing availability under our ~~Omega Credit Facilities~~credit facilities, facility sales and expected proceeds from mortgage and other investment payoffs are adequate to finance operations, meet recurring debt service requirements and fund future investments through the next twelve months.

We regularly review our liquidity needs, the adequacy of cash flow from operations, and other expected liquidity sources to meet these needs. We believe our principal short-term liquidity needs are to fund:

·●

normal recurring expenses;

·●

debt service payments;

·●

capital improvement programs;

·●

common stock dividends; and

·●

growth through acquisitions of additional properties.

The primary source of liquidity is our cash flows from operations. Operating cash flows have historically been determined by: (i) the number of facilities we lease or have mortgages on; (ii) rental and mortgage rates; (iii) our debt service obligations; (iv) general and administrative expenses and (v) our operators’ ability to pay amounts owed. The timing, source and amount of cash flows provided by or used in financing activities and in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in the capital markets environment may impact the availability of cost-effective capital and affect our plans for acquisition and disposition activity.

Cash, cash equivalents and restricted cash totaled ~~$13.5~~$34.1 million as of June 30, ~~2018, a decrease~~2019, an increase of ~~$83.3~~$22.5 million as compared to the balance at December 31, ~~2017.~~2018. The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.

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Operating Activities – Operating activities generated ~~$217.2~~$265.4 million of net cash flow for the six months ended June 30, ~~2018,~~2019, as compared to ~~$264.2~~$217.2 million for the same period in ~~2017, a decrease~~2018, an increase of ~~$47.0~~$48.2 million which is primarily due to ~~lower rental income resulting from facility sales, the loss~~a $50.0 million payment to one of ~~direct financing lease income from Oriana and cash payments for lease inducements~~our operators to acquire a portion of their in-the-money purchase option of which ~~we paid one operator~~ approximately $28.4 million was recorded as a lease inducement during the first quarter of 2018.

Investing Activities – Net cash flow from investing activities was an outflow of ~~$6.3~~$15.0 million for the six months ended June 30, ~~2018,~~2019, as compared to an outflow of ~~$135.9~~$6.3 million for the same period in ~~2017.~~2018. The ~~$129.6~~$8.8 million change in cash flow from investing activities related primarily to (i) a ~~$157.9~~$123.9 million increase in other investments – net, (ii) a $73.3 million increase in proceeds from sale of direct financing lease assets, (iii) a $46.3 million decrease in real estate acquisitions and (iv) a $64.6 million increase in mortgages – net. Offsetting these changes were primarily: (i) a $212.9 million decrease in proceeds from sale of real estate investments, (ii) a ~~$78.2 million decrease in real estate acquisitions and (iii) a $6.9~~$59.6 million increase in ~~receipts from insurance proceeds. Offsetting these changes were: (i)~~cash paid to complete the MedEquities Merger, (iii) a ~~$71.0~~$24.5 million ~~increase in other investments – net primarily~~acquisition related ~~to funding more other investments in 2018, (ii)~~deposit, (iv) a ~~$17.2~~$11.7 million increase in investments in construction in progress in ~~2018,~~2019, as compared to the same period in ~~2017, (iii) an $11.8 million decrease in proceeds from the sale of direct financing lease assets~~2018 and ~~(iv)~~(v) a ~~$7.5~~$5.4 million increase in ~~mortgages – net primarily related~~capital renovation programs in 2019 compared to ~~funding additional mortgages in~~the same period of 2018.

Financing Activities – Net cash flow from financing activities was an outflow of ~~$294.1~~$227.8 million for the six months ended June 30, ~~2018,~~2019, as compared to an outflow of ~~$202.6~~$294.1 million for the same period in ~~2017.~~2018. The ~~$91.5~~$66.3 million change in cash from financing activities was primarily related to (i) a net $35.0 million increase in cash used by our credit facility, (ii) a net $96.7 million increase in cash from our other long-term borrowings, primarily resulting from the second quarter 2017 issuance of $550.0 million 4.75% senior notes due 2028 and $150.0 million 4.5% senior notes due 2025, offset by the repayment of the $400.0 million 5.875% senior notes due 2024 and a reduction in borrowings outstanding under our credit facility and (iii) a $16.3 million increase in dividends paid, offset by (i) a $28.5 million decrease in financing related costs in 2018, as compared to the same period in 2017, (ii) $20.9$75.4 million increase in cash proceeds from the issuance of common stock in ~~2018,~~2019, as compared to the same period in ~~2017 and (iii)~~2018, (ii) a ~~$7.3~~$27.1 million increase in net proceeds from our dividend reinvestment plan in ~~2018,~~2019, as compared to the same period in ~~2017.~~2018 and (iii) a $4.3 million increase in other long-term borrowings – net, offset by (i) a $28.1 million increase in our credit facility borrowings – net and (ii) a $10.8 million increase in dividends paid.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

During the quarter ended June 30, ~~2018,~~2019, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Item 4 – Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of this Form 10-Q, management evaluated the effectiveness of the design and operation of the disclosure controls and procedures of Omega and Omega OP (for purposes of this Item 4, the “Companies”) as of June 30, ~~2018.~~2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures of the Companies were effective at a reasonable assurance level as of June 30, ~~2018.~~2019.

Internal Control Over Financial Reporting

There were no changes in the Companies’ internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report identified in connection with the evaluation of our disclosure controls and procedures described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II–OTHER INFORMATION

Item 1–Legal Proceedings

See Note 16 – Commitments and Contingencies in the ~~Consolidated~~ Financial Statements - Part I, Item 1 hereto, which is hereby incorporated by reference in response to this item.

Item 1A – Risk Factors

~~There have been no material changes~~In addition to ~~our~~the risk factors as previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2017.~~2018, investors should carefully consider the following additional or revised risk factors. This risk should be read in conjunction with the risk factors set forth in our 2018 Form 10-K and the other information contained in this report and our other filings with the Securities and Exchange Commission.

Our investments in a consolidated joint venture and unconsolidated joint ventures could be adversely affected by our lack of sole decision-making authority, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners, and our exposure to potential losses from the actions of our joint venture partners.

As of June 30, 2019, we own a parcel of land through a consolidated joint venture with the intention of building a MOB. As of June 30, 2019, we also have an approximate 15% ownership interests in an unconsolidated joint venture that owns 51 SNFs and a 51% interest in an unconsolidated joint venture that owns an acute care hospital. These joint ventures involve risks not present with respect to our wholly owned properties, including the following:

●

We may be unable to take actions that are opposed by our joint venture partners under arrangements that require us to share decision-making authority over major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture, such as the sale or financing of the property or the making of additional capital contributions for the benefit of the property;

●

For joint ventures in which we have a noncontrolling interest, our joint venture partners may take actions that we oppose;

●

Our ability to sell or transfer our interest in a joint venture to a third party may be restricted if we fail to obtain the prior consent of our joint venture partners;

●

Our joint venture partners may become bankrupt or fail to fund their share of required capital contributions, which could delay construction or development of a property or increase our financial commitment to the joint venture;

●

Our joint venture partners may have business interests or goals with respect to a property that conflict with our business interests and goals, including with respect to the timing, terms and strategies for investment, which could increase the likelihood of disputes regarding the ownership, management or disposition of the property;

●

Disagreements with our joint venture partners could result in litigation or arbitration that increases our expenses, distracts our officers and directors, and disrupts the day-to-day operations of the property, including by delaying important decisions until the dispute is resolved; and

●

We may suffer losses as a result of actions taken by our joint venture partners with respect to our joint venture investments.

The vote by the U.K. to leave the European Union could adversely affect us.

The United Kingdom’s (“U.K.”) referendum on withdrawal from the European Union (“E.U.”) on June 23, 2016 (referred to as “Brexit”), and subsequent notification of the U.K.’s intention to withdraw from the E.U. given on

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March 29, 2017, have adversely impacted global markets and foreign currencies. In particular, the value of the Pound Sterling has sharply declined as compared to the U.S. Dollar and other currencies. This volatility in foreign currencies is expected to continue as the U.K. negotiates and executes its exit from the E.U., but there is uncertainty over what time period this will occur. A significantly weaker Pound Sterling compared to the U.S. Dollar could have a significant negative effect on our business, financial condition and results of operations. The decrease in value to the Pound Sterling and the impacts across global markets and foreign currencies may influence trends in consumer confidence and discretionary spending habits, but given the lack of precedent and uncertainty, it is unclear how Brexit will impact us.

The intention to withdraw began a two-year negotiating period to establish the withdrawal terms. Even if no agreement is reached, the U.K.’s separation still becomes effective if either the U.K. passes legislation to withdraw its previous notification of its intent to withdraw or unless all E.U. members unanimously agree on an extension. Negotiations have commenced to determine the future terms of the U.K. relationship with the E.U., including, among other things, a transition period for implementation of the withdrawal and the terms of trade between the U.K. and the E.U. The U.K. will remain a member of the European Union until the date on which a withdrawal agreement comes into force or, failing that, October 31, 2019, unless another extension is agreed to by the parties.

The effects of Brexit will depend on many factors, including the nature of any agreements that the U.K. makes to retain access to E.U. single markets either during a transitional period or more permanently. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. In a “hard Brexit” scenario, there could be increased costs from re-imposition of tariffs on trade between the U.K. and E.U., shipping delays because of the need for customs inspections and procedures (which may be severe in the near term given the lack of infrastructure or preparedness for such inspections and procedures), and temporary shortages of certain goods. In addition, trade and investment between the U.K., the E.U., the United States and other countries will be impacted by the fact that the U.K. currently operates under the E.U.’s tax treaties. The U.K. will need to negotiate its own tax and trade treaties with countries all over the world, which could take years to complete. In addition, the uncertainty related to Brexit has caused foreign exchange rate fluctuations in the past, including the strengthening of the U.S. dollar relative to the Euro and British Pound Sterling immediately following the announcement of Brexit. The implementation of, or further developments with respect to, Brexit could further impact foreign exchange rates, which could materially adversely affect our business, financial condition and results of operations.

While we cannot anticipate the outcome of these future negotiations, effects could include uncertainty regarding tax exemptions and reliefs within the E.U., as well as expected changes in tariffs and tax laws or regulations which could materially and adversely affect our business, future business opportunities, results of operations, financial condition, liquidity and cash flows.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

During the ~~quarterly period~~quarter ended June 30, ~~2018,~~2019, Omega issued an aggregate of ~~1,350~~251,679 shares of Omega common stock in exchange for an equivalent number of Omega OP Units tendered to Omega OP for redemption in accordance with the provisions of the Partnership Agreement. The Company issued these shares of Omega common stock in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, based upon factual representations received from the limited partners who received the Omega common stock.

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Item 5– Other Information

On August 2, 2019, the Compensation Committee (the “Compensation Committee”) of the Board of Directors of Omega adopted a retirement policy for executive officers. Under the policy, subject to certain limitations, an officer who retires on or after reaching age 62 and performing 10 years of service will be eligible for prorated vesting of earned performance-based long-term equity incentives, 100% vesting of time-based long-term equity incentives and payment of the earned annual cash incentive. The officer must give at least 6 months advance notice of retirement to qualify. The policy applies to incentives with a grant date on or after January 1, 2020. The Compensation Committee reserved the right to amend or terminate the policy, but such action may not adversely affect an officer’s rights under then outstanding incentives.

For the performance-based long-term equity incentives, the actual achievement of the performance goals will be determined at the end of the performance period in the same manner as for officers who remain employed by Omega. If the officer retires before the end of the performance period, the officer will vest in a prorated portion of the earned incentive based on the number of days employed by Omega during the performance period. If the officer retires after the end of the performance period, the officer will be 100% vested in the earned incentive. For the time-based long-term equity incentives, as a condition of vesting, the officer’s date of retirement cannot be before December 31 of the year in which the grant is made. For the annual cash incentive, achievement of the performance goals will be determined at the end of the performance period in the same manner as for officers who remain employed by Omega, and as a condition of payment of the earned incentive, the date of retirement must occur on or after the last day of the performance period.

As a condition of vesting and payment, the retired officer must comply until the date payment is made with the non-competition and non-solicitation provisions in the retired officer’s employment agreement, the applicable award agreement, the annual cash incentive program or as may be otherwise applicable and the obligations in the retired officer’s intellectual property and invention assignment agreement. All incentives payable to a retired officer will be paid on the same schedule as applies to officers who continue in Omega’s employment.

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Item 6–Exhibits

~~Exhibit No.~~
~~10.1~~ Exhibit No.		~~2018 Stock Incentive Plan (Incorporated by reference to Form 8-K filed June 11, 2018).~~
~~10.2~~		Omega Healthcare Investors, Inc. Deferred Cash Compensation Plan with form of Deferral Agreement pursuant to the Omega Healthcare Investors, Inc. Deferred Cash Compensation Plan (June 30, 2018).*
~~10.3~~ 10.1		~~Fourth Amendment to Steven Insoft~~Form of 2019 Employment Agreement ~~(Incorporated by reference to~~Amendments for the ~~Form 8-K filed May 1, 2018)~~Company’s executive officers (Fourth Amendment).*
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Omega Healthcare Investors, Inc.*
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Omega Healthcare Investors, Inc.*
31.3		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of OHI Healthcare Properties Limited Partnership.*
31.4		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of OHI Healthcare Properties Limited Partnership.*
32.1		Section 1350 Certification of the Chief Executive Officer of Omega Healthcare Investors, Inc.*
32.2		Section 1350 Certification of the Chief Financial Officer of Omega Healthcare Investors, Inc.*
32.3		Section 1350 Certification of the Chief Executive Officer of OHI Healthcare Properties Limited Partnership.*
32.4		Section 1350 Certification of the Chief Financial Officer of OHI Healthcare Properties Limited Partnership.*
101.INS		XBRL Instance ~~Document.~~Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document..
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101).

* Exhibits that are filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OMEGA HEALTHCARE INVESTORS, INC.

Registrant

Date:	August 8, ~~2018~~2019	By:	/S/ C. TAYLOR PICKETT
			C. Taylor Pickett
			Chief Executive Officer

Date:	: August 8, ~~2018~~2019	By:	/S/ ROBERT O. STEPHENSON
			Robert O. Stephenson
			Chief Financial Officer

OHI HEALTHCARE PROPERTIES LIMITED PARTNERSHIP

Co-Registrant

By: Omega Healthcare Investors, Inc., its General Partner

~~Date:~~
Date: : August 8, ~~2018~~2019	By:	/S/ C. TAYLOR PICKETT
			C. Taylor Pickett
			Chief Executive Officer

Date:	: August 8, ~~2018~~2019	By:	/S/ ROBERT O. STEPHENSON
			Robert O. Stephenson
			Chief Financial Officer

~~Maryland~~	~~1-11316~~	~~38-3041398~~
Maryland	1-11316	38-3041398
(Omega Healthcare Investors, Inc.)	(Omega Healthcare Investors, Inc.)	(Omega Healthcare Investors, Inc.)
Delaware	333-203447-11	36-4796206
(OHI Healthcare Properties Limited Partnership)	(OHI Healthcare Properties Limited Partnership)	(OHI Healthcare Properties Limited Partnership)
(State or other jurisdiction of incorporation or organization)	(Commission file number)	(IRS Employer Identification No.)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.10 par value	OHI	New York Stock Exchange


Large accelerated filer x⌧	Accelerated filer¨◻	Non-accelerated filer¨◻	Smaller reporting company¨◻	Emerging growth company¨◻


Large accelerated filer¨◻	Accelerated filer¨◻	Non-accelerated filerx ⌧	Smaller reporting company¨◻	Emerging growth company¨◻


Omega Healthcare Investors, Inc.
Common Stock, $.10 par value		~~200,335,705~~216,553,668

OHI Healthcare Properties Limited Partnership
N/A		No common stock outstanding
(Class)		(Number of shares)

	x
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	¨
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Omega Healthcare Investors, Inc. Yes  No ◻	OHI Healthcare Properties Limited Partnership Yes No◻

		~~Page~~ ~~No.~~
~~PART I~~			~~Financial Information~~	TABLE OF CONTENTS
		Page No.
PART I	Financial Information

Item 1.	Financial Statements of Omega Healthcare Investors, Inc.:
	Consolidated Balance Sheets
	June 30, ~~2018~~2019 (unaudited) and December 31, ~~2017~~2018	2
	Consolidated Statements of Operations (unaudited)
	Three and Six months ended June 30, ~~2018~~2019 and ~~2017~~2018	3
	Consolidated Statements of Comprehensive Income (unaudited)
	Three and Six months ended June 30, ~~2018~~2019 and ~~2017~~2018	4
	Consolidated ~~Statement~~Statements of Changes in Equity (unaudited)
	Three and Six months ended June 30, 2019 and 2018	5
	Consolidated Statements of Cash Flows (unaudited)
	Six months ended June 30, ~~2018~~2019 and ~~2017~~2018	6 7

	Financial Statements of OHI Healthcare Properties Limited ~~Partnership:~~Partnership:
	Consolidated Balance Sheets
	June 30, ~~2018~~2019 (unaudited) and December 31, ~~2017~~2018	7 8
	Consolidated Statements of Operations (unaudited)
	Three and Six months ended June 30, ~~2018~~2019 and ~~2017~~2018	8 9
	Consolidated Statements of Comprehensive Income (unaudited)
	Three and Six months ended June 30, ~~2018~~2019 and ~~2017~~2018	9 10
	Consolidated ~~Statement~~Statements of Changes in Owners’ Equity (unaudited)
	Three and Six months ended June 30, 2019 and 2018	10 11
	Consolidated Statements of Cash Flows (unaudited)
	Six months ended June 30, ~~2018~~2019 and ~~2017~~2018	11 13

	Notes to Consolidated Financial Statements
	June 30, ~~2018~~2019 (unaudited)	12 14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 47

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56 65

Item 4.	Controls and Procedures	56 65

PART II	Other Information

Item 1.	Legal Proceedings	57 66

Item 1A.	Risk Factors	57 66

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57 67

Item 5.	Other Information	68

Item 6.	Exhibits	58 69

	June 30,			December 31,
	2018			2017
	(Unaudited)
ASSETS
Real estate properties
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
Investments in direct financing leases – net		349,465			364,965
Mortgage notes receivable – net		703,309			671,232
		7,148,972			7,315,329
Other investments – net		377,206			276,342
Investment in unconsolidated joint venture		32,820			36,516
Assets held for sale – net		3,782			86,699
Total investments		7,562,780			7,714,886

Cash and cash equivalents		10,951			85,937
Restricted cash		2,598			10,871
Accounts receivable – net		320,140			279,334
Goodwill		644,369			644,690
Other assets		33,301			37,587
Total assets	$	8,574,139		$	8,773,305

LIABILITIES AND EQUITY
Revolving line of credit		220,000			290,000
Term loans – net		902,168			904,670
Secured borrowings – net		-			53,098
Unsecured borrowings – net		3,325,889			3,324,390
Accrued expenses and other liabilities		257,049			295,142
Deferred income taxes		14,718			17,747
Total liabilities		4,719,824			4,885,047

Equity:
Common stock $.10 par value authorized – 350,000 shares, issued and outstanding – 200,332 shares as of June 30, 2018 and 198,309 as of December 31, 2017		20,033			19,831
Common stock – additional paid-in capital		4,997,329			4,936,302
Cumulative net earnings		2,011,689			1,839,356
Cumulative dividends paid		(3,473,406	)		(3,210,248	)
Accumulated other comprehensive loss		(30,157	)		(30,150	)
Total stockholders’ equity		3,525,488			3,555,091
Noncontrolling interest		328,827			333,167
Total equity		3,854,315			3,888,258
Total liabilities and equity	$	8,574,139		$	8,773,305

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Revenue
Rental income	$	192,850		$	193,997		$	386,799		$	386,534
Income from direct financing leases		497			15,462			1,110			31,108
Mortgage interest income		16,834			16,297			33,413			32,253
Other investment income		9,097			7,278			17,624			14,192
Miscellaneous income		603			2,763			1,134			3,454
Total operating revenues		219,881			235,797			440,080			467,541

Expenses
Depreciation and amortization		69,609			70,350			139,970			140,343
General and administrative		15,237			11,541			31,712			24,065
Acquisition costs		-			19			-			(22	)
(Recovery) impairment on real estate properties		(1,097	)		10,135			3,817			17,773
Provision for uncollectible accounts		564			2,673			8,378			5,077
Total operating expenses		84,313			94,718			183,877			187,236

Income before other income and expense		135,568			141,079			256,203			280,305
Other income (expense)
Interest income and other - net		1,125			254			1,710			258
Interest expense		(48,082	)		(48,085	)		(96,093	)		(93,126	)
Interest – amortization of deferred financing costs		(2,242	)		(2,543	)		(4,485	)		(5,045	)
Interest – refinancing costs		-			(21,965	)		-			(21,965	)
Contractual settlement		-			-			-			10,412
Realized (loss) gain on foreign exchange		(66	)		79			(7	)		140
Total other expense		(49,265	)		(72,260	)		(98,875	)		(109,326	)

Income before (loss) gain on assets sold		86,303			68,819			157,328			170,979
(Loss) gain on assets sold – net		(2,891	)		(622	)		14,609			6,798
Income from continuing operations		83,412			68,197			171,937			177,777
Income tax expense		(838	)		(591	)		(1,381	)		(1,691	)
(Loss) income from unconsolidated joint venture		(588	)		551			(637	)		1,183
Net income		81,986			68,157			169,919			177,269
Net income attributable to noncontrolling interest		(3,450	)		(2,900	)		(7,163	)		(7,572	)
Net income available to common stockholders	$	78,536		$	65,257		$	162,756		$	169,697

Earnings per common share available to common stockholders:
Basic:
Net income available to common stockholders	$	0.39		$	0.33		$	0.82		$	0.86
Diluted:
Net income	$	0.39		$	0.33		$	0.82		$	0.86

Dividends declared per common share	$	0.66		$	0.63		$	1.32		$	1.25

Weighted-average shares outstanding, basic		199,497			197,433			199,204			197,223
Weighted-average shares outstanding, diluted		208,460			206,672			208,139			206,423

											Accumulated
	Common		Additional			Cumulative					Other			Total
	Stock		Paid-in			Net		Cumulative			Comprehensive			Stockholders’			Noncontrolling			Total
	Par Value		Capital			Earnings		Dividends			Loss			Equity			Interest			Equity
Balance at December 31, 2017 (198,309 common shares & 8,772 Omega OP Units)	$	19,831	$	4,936,302		$	1,839,356	$	(3,210,248	)	$	(30,150	)	$	3,555,091		$	333,167		$	3,888,258
Cumulative effect of accounting change (see Note 1)		-		-			9,577		-			-			9,577			423			10,000
Balance at January 1, 2018 (198,309 common shares & 8,772 Omega OP Units)		19,831		4,936,302			1,848,933		(3,210,248	)		(30,150	)		3,564,668			333,590			3,898,258
Grant of restricted stock to company directors (38 shares at $30.36 per share)		4		(4	)		-		-			-			-			-			-
Stock-based compensation expense		-		8,145			-		-			-			8,145			-			8,145
Vesting/exercising of equity compensation plan, net of tax withholdings (89 shares)		9		(1,663	)		-		-			-			(1,654	)		-			(1,654	)
Dividend reinvestment and stock purchase plan (948 shares at an average of $28.55 per share)		95		26,955			-		-			-			27,050			-			27,050
Deferred compensation directors (35 shares at $30.42 per share)		3		134			-		-			-			137			-			137
Equity Shelf Program (912 shares at $30.16 per share, net of issuance costs)		91		27,418			-		-			-			27,509			-			27,509
Common dividends declared ($1.32 per share)		-		-			-		(263,158	)		-			(263,158	)		-			(263,158	)
Conversion of Omega OP Units to common stock (1 share at $31.26 per share)		-		42			-		-			-			42			-			42
Redemption of Omega OP Units (6 units at $28.06 per share)		-		-			-		-			-			-			(160	)		(160	)
Omega OP Units distributions		-		-			-		-			-			-			(11,765	)		(11,765	)
Comprehensive income:
Foreign currency translation		-		-			-		-			(6,019	)		(6,019	)		(265	)		(6,284	)
Cash flow hedges		-		-			-		-			6,012			6,012			264			6,276
Net income		-		-			162,756		-			-			162,756			7,163			169,919
Total comprehensive income																					169,911
Balance at June 30, 2018 (200,332 shares & 8,766 Omega OP Units)	$	20,033	$	4,997,329		$	2,011,689	$	(3,473,406	)	$	(30,157	)	$	3,525,488		$	328,827		$	3,854,315

	General		Limited
	Partners’		Partners’			Total			General			Limited			Total
	Omega		Omega			Omega			Partners’			Partners’			Owners’
	OP Units		OP Units			OP Units			Equity			Equity			Equity
Balance at December 31, 2017		198,309		8,772			207,081		$	3,555,091		$	333,167		$	3,888,258
Cumulative effect of accounting change (see Note 1)		-		-			-			9,577			423			10,000
Balance at January 1, 2018		198,309		8,772			207,081			3,564,668			333,590			3,898,258
Contributions from partners		2,023		-			2,023			61,229			-			61,229
Distributions to partners		-		-			-			(263,158	)		(11,765	)		(274,923	)
Omega OP Unit redemptions		-		(6	)		(6	)		-			(160	)		(160	)
Comprehensive income
Foreign currency translation		-		-			-			(6,019	)		(265	)		(6,284	)
Cash flow hedges		-		-			-			6,012			264			6,276
Net income		-		-			-			162,756			7,163			169,919
Total comprehensive income																169,911
Balance at June 30, 2018		200,332		8,766			209,098		$	3,525,488		$	328,827		$	3,854,315

	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

2018⁽¹⁾				2019⁽¹⁾				2020⁽¹⁾				2021⁽¹⁾				2022⁽¹⁾				2023⁽¹⁾
$	580			$	1,166			$	1,170			$	1,084			$	1,106			$	1,128

	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

	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

	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

	(in thousands)
Balance as of December 31, 2017	$	644,690
Less: foreign currency translation		(321	)
Balance as of June 30, 2018	$	644,369

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

	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	)

				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

			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

	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

Total commitment	$	730,009
Amounts funded⁽¹⁾		(450,050	)
Remaining commitment	$	279,959

	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