CONTRACTUAL RECEIVABLES AND OTHER RECEIVABLES AND LEASE INDUCEMENTS

12 Months Ended

Dec. 31, 2021

CONTRACTUAL RECEIVABLES AND OTHER RECEIVABLES AND LEASE INDUCEMENTS [Abstract]

CONTRACTUAL RECEIVABLES AND OTHER RECEIVABLES AND LEASE INDUCEMENTS

NOTE 5 – CONTRACTUAL RECEIVABLES AND OTHER RECEIVABLES AND LEASE INDUCEMENTS

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 income over the non-cancellable lease term.

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

	December 31,		December 31,
	2021		2020
	(in thousands)
Contractual receivables – net	$	11,259	$	10,408
Effective yield interest receivables	$	9,590	$	12,195
Straight-line rent receivables		148,455		139,046
Lease inducements		93,770		83,425
Other receivables and lease inducements	$	251,815	$	234,666

Agemo Holdings, LLC

From August 2021 through October 2021 and in December 2021, Agemo Holdings, LLC (“Agemo”), failed to pay contractual rent and interest due under their lease and loan agreements, but paid rent and interest in November 2021. Agemo was formed in May 2018 by Signature Healthcare, LLC, as part of an out-of-court restructuring agreement, to be the holding company of their leases and loans with Omega.

We placed Agemo on a cash basis of revenue recognition during the third quarter of 2020 as collection of substantially all contractual lease payments due from them was deemed no longer probable because of information received regarding substantial doubt of their ability to continue as a going concern. As a result, we wrote-off approximately $75.3 million of contractual rent receivables, straight-line rent receivables, and lease inducements to rental income during the third quarter of 2020. Agemo continued to make their rental and interest payments to us until August 2021. During the third and fourth quarters of 2021, we recorded $8.7 million of revenue by collecting rental and interest payments and we recorded $8.5 million of revenue by drawing on the letter of credit and through application of the security deposit balance. See Note 8 – Other Investments for additional details on our loans with Agemo. For the years ended December 31, 2021, 2020 and 2019, Agemo generated approximately 3.9%, 5.6% and 6.9%, respectively, of our total revenues (excluding the impact of write-offs).

As part of the 2018 restructuring agreement with Agemo discussed above, Omega agreed to, among other terms, defer rent of $6.3 million per annum through April 2021. During the year ended December 31, 2021, the Agemo lease was amended to allow for the extension of the rent deferral through January 2022, which represents an additional deferral of approximately $4.7 million of rent. Additionally, during the year ended December 31, 2021, we entered into a forbearance agreement with Agemo pursuant to which we agreed to forbear from exercising remedies under our lease and loan agreements until January 31, 2022. The forbearance period and rent deferral period were subsequently extended to February 28, 2022.

Guardian Healthcare

From October 2021 through December 2021, Guardian Healthcare (“Guardian”) failed to make contractual rent and interest payments under its lease agreement for 26 operating facilities and on its $112.5 million mortgage loan agreement, bearing interest at 10.81%, for nine facilities, due to ongoing liquidity issues. The Company is currently in on-going negotiations to restructure and amend Guardian’s lease and loan agreements. As part of the restructuring negotiations, on December 30, 2021, we acquired 2 facilities, previously subject to the Guardian mortgage loan, in consideration for a reduction of $8.7 million in the mortgage principal and added the facilities to the master lease agreement. Subsequent to year end, in February 2022, we completed additional restructuring activities related to Guardian, including selling and re-leasing certain facilities as discussed further in Note 23 – Subsequent Events.

As a result of Guardian’s non-payment of contractual rent and the anticipated restructuring noted above, in the fourth quarter of 2021, we placed Guardian on a cash basis of revenue recognition and wrote-off approximately $14.0 million of straight-line rent receivables and lease inducements through rental income. As of December 31, 2021, we have $7.4 million of letters of credit from Guardian as collateral which could be applied against our uncollected rent and interest receivables. See Note 7 – Mortgage Notes Receivable for additional details on our mortgage with Guardian. Guardian represents approximately 2.5%, 3.5% and 3.8% of our total revenues (excluding the impact of straight-line write-offs) for the years ended December 31, 2021, 2020 and 2019, respectively.

Gulf Coast

During the second quarter of 2021, Gulf Coast stopped paying contractual rent under its master lease agreement because of on-going liquidity issues. Gulf Coast operates 24 facilities subject to a master lease with Omega and represents approximately 3.3%, 2.8% and 2.7% of Omega’s total revenues (excluding the impact of write-offs) for the years ended December 31, 2021, 2020 and 2019, respectively.

As a result of Gulf Coast’s default under its master lease agreement, in August 2021, we exercised our right to accelerate the full amount of rent due under Gulf Coast’s master lease agreement. On October 14, 2021, Gulf Coast commenced voluntary cases under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The payment of our accelerated rent will be subject to the Bankruptcy Code and approval of the bankruptcy court in Gulf Coast’s Chapter 11 cases. As described in Gulf Coast’s filings with the Bankruptcy Court, we have entered into a Restructuring Support Agreement (the “Support Agreement”) that forms the basis for Gulf Coast’s intended restructuring and liquidation. The Support Agreement establishes a timeline for the implementation of Gulf Coast’s planned restructuring and liquidation, including the transition of management of the operations of the facilities to a third-party operator. As part of the Support Agreement, we committed to provide up to $25 million of senior secured debtor-in-possession (“DIP”) financing to Gulf Coast, which is discussed in further detail in Note 8 – Other Investments. In November 2021, Gulf Coast entered into management and operations transfer agreements (“MOTAs”) with a new manager (“New Manager”), pursuant to which the management of 23 of the 24 facilities subject to the master lease with Omega would be performed by New Manager during an interim period until the license for the facilities subject to the MOTAs could be obtained by a new operator (“New Operator”). During the interim period, no rent is being paid by Gulf Coast, and we have provided a $20 million working capital loan to New Manager, discussed in further detail in Note 8 – Other Investments. The Bankruptcy Court approved the MOTAs on November 24, 2021 and the operations were transitioned effective December 1, 2021.

As a result of Gulf Coast’s non-payment of contractual rent, in the second quarter of 2021, we placed Gulf Coast on a cash basis of revenue recognition and wrote-off straight-line rent receivable balances of $17.4 million through rental income. Subsequent to placing Gulf Coast on a cash basis of revenue recognition in June 2021, we recognized $24.6 million of rental income over the remaining period of 2021, based on our ability to offset any uncollected rent receivables against Gulf Coast’s security deposit and against certain debt obligations of Omega, as discussed further below. We held a security deposit of $3.3 million from Gulf Coast, which we have applied against Gulf Coast’s obligations in the second and third quarters of 2021. In relation to Gulf Coast, a subsidiary of Omega (“Omega Obligor”) is the obligor on five notes due to third parties with aggregate outstanding principal of $20.0 million (collectively, the “Subordinated Debt”) that bear interest at 9% per annum with a maturity date of December 21, 2021 (see Note 14 – Borrowing Activities and Arrangements). Under the terms of the Subordinated Debt, to the extent Gulf Coast fails to pay rent when due to us under its master lease, Gulf Coast’s unpaid rent can be used to offset Omega Obligor’s obligations under the Subordinated Debt (on a quarterly basis with respect to interest and, under some circumstances, on an annual basis with respect to principal). As of December 31, 2021, we have offset $1.3 million of accrued interest and $20.0 million of principal under the Subordinated Debt against the uncollected rent under the master lease with Gulf Coast. Following the application of these offsets, Omega has no further obligations under the Subordinated Debt.

In August 2021, following an assertion by the holders of the Subordinated Debt that our prior exercise of offset rights had resulted in defaults under the terms of the Subordinated Debt, we also filed suit in the Circuit Court for Baltimore County against the holders of the Subordinated Debt seeking a declaratory judgment to, among other items, declare that the aggregate amount of unpaid rent due from Gulf Coast under the master lease agreement exceeds all amounts which otherwise would be due and owing by Omega Obligor under the Subordinated Debt, and that all principal and interest due and owing under the Subordinated Debt may be (and was) offset in full as of December 31, 2021. In October 2021, the defendants in the case filed a motion to dismiss for lack of personal jurisdiction. While Omega believes that Omega Obligor is entitled to the enforcement of the offset rights sought in the action, the outcome of litigation is unpredictable, and Omega cannot predict the outcome of the declaratory judgment action.

Daybreak

During the third quarter of 2017, we placed Daybreak on a cash basis for revenue recognition as a result of 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 until January 2018, subject to certain conditions.  During the fourth quarter of 2018, Daybreak was no longer in compliance with the 2017 Settlement and Forbearance Agreement.  

On January 30, 2019, we entered into a Second Amendment to the 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. Except for $1.1 million in required real estate tax escrows, Daybreak met their contractual payment obligations through the second quarter of 2019; however, during the second half of 2019, Daybreak did not meet their full contractual payment obligations to us as we received approximately $1.3 million of cash rent.  

During 2020, as part of our plan to transition and sell our Daybreak facilities, we transitioned 31 Daybreak facilities to existing operators. The total annual contractual rent from the 31 transitioned facilities was approximately $12.4 million. In 2021, we transitioned 14 additional facilities to existing operators with annual contractual rent of approximately $4.0 million and sold the remaining four Daybreak facilities. The transition and sale of these facilities completed our exit from our relationship with Daybreak.

Other straight-line receivables and write-offs

In addition to the Guardian and Gulf Coast straight-line receivable write-offs in 2021 discussed above, we wrote-off straight-line rent receivable balances of $5.9 million through rental income in 2021 primarily due to placing four other operators (one operator in the first quarter, two operators in the third quarter and one operator in the fourth quarter) on a cash basis of revenue recognition. We determined that collection of substantially all contractual lease payments with these operators was no longer probable for various reasons. The placement of an operator on a cash basis of revenue recognition during the first quarter was because the operator stopped paying contractual rent under our lease agreement. The two operators placed on a cash basis of revenue recognition during the third quarter and the one operator placed on a cash basis of revenue recognition during the fourth quarter are current with rent payments as of December 31, 2021. The four operators collectively represent approximately 0.8%, 1.0% and 1.0%, respectively, of our total revenues (excluding the impact of write-offs) for the years ended December 31, 2021, 2020 and 2019.

In addition to the write-off of Agemo’s contractual receivables, straight-line rent receivables, and lease inducements in the third quarter of 2020 discussed above, we wrote-off approximately $67.7 million of contractual receivables, straight-line rent receivables, and lease inducements through rental income in 2020 as a result of placing three operators (excluding Agemo discussed above) on a cash basis resulting from a change in our evaluation of the collectibility of future rent payments due under the respective lease agreements. In part, our conclusions were based on information the Company received from these three operators during the third and fourth quarters of 2020 regarding substantial doubt as to their ability to continue as a going concern. Of the $67.7 million, $64.9 million related to Genesis Healthcare, Inc. (“Genesis”) and $2.8 million related to two other operators which lease five facilities from the Company. During 2020, we also wrote-off approximately $3.6 million of straight-line rent receivables to rental income as a result of transitioning facilities to other existing operators. In addition, during 2020, we received a one-time rent payment of approximately $55.4 million from Maplewood, in conjunction with the restructuring of its master lease and loans with Omega (see Note 8 – Other Investments). This payment was accounted for as an adjustment to straight-line rent receivables and is being amortized over the remaining term of the master lease.

During 2019, we wrote-off approximately $11.1 million of contractual receivables, straight-line rent receivables and lease inducements to rental income, of which $9.9 million resulted from placing five operators on a cash basis of revenue recognition due to changes in our evaluation of the collectibility of future rent payments due under the respective lease agreements. The remaining $1.2 million write-off of straight-line rent receivables to rental income resulted from transitioning a facility to another existing operator.  

Lease Inducements

For the years ended December 31, 2021, 2020 and 2019, we provided fundings of $22.3 million, $34.1 million, and $50.8 million, respectively, to our operators subject to operating leases, which were accounted for as lease inducements and will be amortized as a reduction to rental income over the remaining term of the leases. Of the $22.3 million funded in 2021, $20 million was paid to Consulate Health Care (“Consulate”), $2.3 million was paid to four other existing operators. Of the $34.1 million funded in 2020, $23.9 million was paid to Maplewood for development and start-up related costs and the remaining $10.2 million was paid to three other operators. Of the $50.8 million funded in 2019, $15.0 million was paid to Genesis and the remaining $35.8 million was paid to seven other existing operators.