Our leased real estate properties, represented by 782 SNFs, 114 ALFs, 28 specialty facilities and two medical office buildings at December 31, 2019, are leased under provisions of single or master operating leases. Also see Note 4 – Direct Financing Leases for information regarding additional properties accounted for as direct financing leases.

For the years ended December 31, 2019, 2018 and 2017, we capitalized $13.9 million, $11.1 million and $8.0 million, respectively, of interest to our projects under development.

The following tables summarize the significant transactions that occurred in 2019:

(1)

Initial annual cash yield reflects the initial annual cash rent divided by the purchase price.

(2)

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

(3)

Acquired via a deed-in-lieu of foreclosure.

During 2019, we acquired one parcel of land (not reflected in the table above) for approximately $10.7 million with the intent of building a new facility for an existing operator.

Encore Portfolio Acquisition

On October 31, 2019, we completed the $757 million portfolio acquisition of 60 facilities (the “Encore Portfolio”). Consideration consisted of approximately $369 million of cash and the assumption of approximately $389 million in mortgage loans guaranteed by HUD. See Note 13 – Borrowing Arrangements for additional information.

The following table highlights the fair value of the assets acquired and liabilities assumed on October 31, 2019:


	(in thousands)
Fair value of net assets acquired:
Real estate investments	$	735,182
Other investments		600
Contractual receivables		2,216
Cash		227
Other assets		28,173
Total investments		766,398
Secured borrowings		(388,627)
Accrued expenses and other liabilities		(8,978)
Fair value of net assets acquired	$	368,793

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 ⁽³⁾	$	421,600
Mortgage notes receivable (see Note 5)		108,097
Other investments		19,192
Investment in unconsolidated joint venture		73,834
Cash		4,067
Contractual receivables		1,461
Other assets ^{(1) (3)}		32,819
Total investments		661,070
Debt		(285,100)
Accrued expenses and other liabilities ⁽²⁾⁽³⁾		(30,421)
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.

(3)	With the exception of real estate investments, above market lease assets and below market lease liabilities, the fair value estimates above are final.

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 December 31, 2019, we recognized approximately $35.2 million of total revenue from the assets acquired in connection with the MedEquities Merger. For the year ended December 31, 2019, we incurred approximately $5.1 million of acquisition and merger related costs associated with the MedEquities Merger.

Pro Forma Acquisition Results

The following unaudited pro forma information presents consolidated financial information as if the MedEquities Merger occurred on January 1, 2018. In the opinion of management, all significant necessary adjustments to reflect the effect of the merger have been made. The following pro forma information is not indicative of future operations.



	Pro Forma
	Year Ended December 31,
	2019			2018
		(in thousands, except per share amounts, unaudited)

Pro forma revenues	$	950,318	$	938,782
Pro forma net income	$	362,220	$	321,232

Earnings per share – diluted:
Net income – as reported	$	1.58	$	1.40
Net income – pro forma	$	1.60	$	1.48

2018 Acquisitions and Other


	Number of			Total					Building & Site		Furniture		Initial
	Facilities		Country/	Investment⁽⁴⁾			Land		Improvements		& Equipment		Annual
Period	SNF	ALF/ILF	State	(in millions)									Cash Yield⁽³⁾
Q1	—	1	UK	$	4.0	⁽¹⁾	$	0.9	$	2.9	$	0.2	8.50	%
Q1	—	1	UK		5.7	⁽²⁾		1.4		4.1		0.2	8.50	%
Q1	1	—	PA		7.4			1.6		5.4		0.4	9.50	%
Q1	1	—	VA		13.2			2.4		10.5		0.3	9.50	%
Q2	5	—	TX		22.8			0.5		20.4		1.9	9.50	%
Q4	3	1	PA		35.1			4.1		29.2		1.8	9.50	%
Q4	1	—	IN		8.3			1.7		6.0		0.6	9.50	%
Q4	1	—	OH		9.2			0.8		7.9		0.5	9.50	%
Total	12	3		$	105.7		$	13.4	$	86.4	$	5.9

(1)	We recorded a non-cash deferred tax liability of approximately $0.4 million in connection with this acquisition.

(2)	We recorded a non-cash deferred tax liability of approximately $0.2 million in connection with this acquisition.

(3)	Initial annual cash yield reflects the initial annual cash rent divided by the purchase price.

(4)	All of these acquisitions were accounted for as asset acquisitions.

During 2018, we acquired two parcels of land (not reflected in the table above) for approximately $3.5 million with the intent of building new facilities for our existing operators.

During 2018, we transitioned 21 SNFs and one ALF subject to direct financing leases (not reflected in the table above) with a net carrying value of approximately $184.5 million from an existing operator to five other existing operators subject to single or master operating leases with an initial annual cash yield of approximately 9%. We recorded approximately $184.5 million of real estate investments consisting of land ($11.2 million), building and site improvements ($159.1 million) and furniture and fixtures ($14.2 million) in partial satisfaction of the direct financing leases. In connection with these transitions, we provided the new operators with working capital loans with a maximum borrowing capacity of $45.7 million, commitments to fund capital improvements up to $10.6 million and indemnities with a maximum funding of $7.4 million. Claims against these indemnities must occur within 18 months to 36 months of the transition date. These indemnities were provided to the new operators upon transition and would be utilized in the event that the prior operator does not perform under their transition agreements. As of December 31, 2019, we have not and we do not expect to fund a material amount under these indemnity agreements.

2017 Acquisitions and Other


	Number of			Total					Building & Site		Furniture		Initial
	Facilities		Country/	Investment⁽⁴⁾			Land		Improvements		& Equipment		Annual
Period	SNF	ALF/ILF	State	(in millions)									Cash Yield ⁽²⁾
Q1	—	1	VA	$	7.6		$	0.5	$	6.8	$	0.3	7.50	%
Q2	1	—	NC		8.6			0.7		7.3		0.6	9.50	%
Q2	—	18	UK		124.2	⁽¹⁾		34.1		85.1		5.0	8.50	%
Q3	—	1	TX		2.3			0.7		1.5		0.1	9.25	%
Q3	15	—	IN		211.0			18.0		180.2		12.8	9.50	%
Q3	9	—	TX		19.0	⁽³⁾		1.7		15.5		1.8	18.60	%
Q4	6	—	TX		40.0			1.0		35.1		3.9	9.25	%
Total	31	20		$	412.7		$	56.7	$	331.5	$	24.5

(1)	We recorded a non-cash deferred tax liability and acquisition costs of approximately $8.2 million and $1.2 million, respectively, in connection with this acquisition.

(2)	Initial annual cash yield reflects the initial annual cash rent divided by the purchase price.

(3)

In July 2017, we transitioned nine SNFs formerly subject to a direct financing lease to another operator. As a result of terminating the direct financing lease, we wrote down the facilities to our original cost basis and recorded an impairment on the direct financing lease of approximately $1.8 million. See Note 4 – Direct Financing Leases for additional information.

(4)	All of these acquisitions were accounted for as asset acquisitions.

During 2017, we acquired three parcels of land (not reflected in the table above) for approximately $6.7 million with the intent of building new facilities for existing operators.

Asset Sales, Impairments and Other

During the fourth quarter of 2019, we sold 11 facilities (three previously held for sale at September 30, 2019) for approximately $33.3 million in net cash proceeds recognizing a gain on sale of approximately $2.9 million. In addition, we recorded impairments on real estate properties of approximately $35.7 million on 17 facilities (five were subsequently reclassified to held for sale).

In 2019, we sold 34 facilities (one was previously held for sale at December 31, 2018) for approximately $219.3 million in net cash proceeds recognizing a net gain of approximately $55.7 million. In addition, we recorded impairments on real estate properties of approximately $45.3 million on 23 facilities. After considering the impairments recorded and facilities sold during the year, the total net recorded investment in these properties was approximately $23.4 million as of December 31, 2019, with approximately $4.6 million related to properties classified as held for sale. Our impairments were offset by approximately $3.7 million of insurance proceeds received related to two facilities that were previously destroyed.

In 2018, we sold 78 facilities (22 previously held for sale at December 31, 2017) subject to operating leases for approximately $309.6 million in net proceeds recognizing a gain on sale of approximately $24.8 million. In addition, we recorded impairments on real estate properties of approximately $35.0 million on 35 facilities. Our impairments were offset by $5.2 million of insurance proceeds received related to a facility destroyed in November 2017. After considering the impairments recorded and facilities sold during the year, the total net recorded investment in these properties was approximately $14.8 million as of December 31, 2018, with approximately $1.0 million related to properties classified as held for sale.

Of the 78 facilities sold during 2018, we sold 12 SNFs on June 1, 2018 secured by HUD mortgages to subsidiaries of an existing operator. The Company sold the 12 SNF facilities with carrying values of approximately $62 million for approximately $78 million which consisted of $25 million of cash consideration and their assumption of approximately $53 million of our HUD mortgages. See Note 13 – Borrowing 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.

In 2017, we sold 52 facilities (14 previously held for sale at December 31, 2016) subject to operating leases for approximately $257.8 million in net proceeds recognizing a gain on sale of approximately $53.9 million. In addition, we recorded impairments on real estate properties of approximately $99.1 million on 37 facilities including approximately $2.6 million of capitalized costs associated with the termination of construction projects with two of our operators. After considering the impairments recorded and facilities sold during the year, the total net recorded investment in these properties was approximately $125.1 million as of December 31, 2017.

Of the 52 facilities sold in 2017, the sale of ten of these facilities did not initially qualify for sale accounting under the full accrual method. The ten SNFs with a carrying value of approximately $23.2 million were sold to a third-party for approximately $43.3 million, resulting in a total gain of approximately $17.5 million after $2.6 million of closing costs. In connection with this sale, we provided the buyer a $10.0 million loan. We recognized a net gain of approximately $7.5 million in 2017. Upon our adoption of ASU 2014-09 on January 1, 2018, we recognized $10.0 million of deferred gain related to this sale through opening equity on January 1, 2018.

The 2019, 2018 and 2017 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 held for sale, to their estimated fair value less costs to sell. To estimate the fair value of the facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) and/or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 inputs).