PROPERTIES

12 Months Ended

Dec. 31, 2012

Real Estate [Abstract]

PROPERTIES

NOTE 3 - PROPERTIES

Leased Property

Our leased real estate properties, represented by 418 SNFs, 16 ALFs and 11 specialty facilities at December 31, 2012, are leased under provisions of single leases and master leases with initial terms typically ranging from 5 to 15 years, plus renewal options.  Substantially all of the leases and master leases provide for minimum annual rentals that are typically subject to annual increases based upon fixed escalators or the lesser of a fixed amount or increases derived from changes in CPI.  Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties.

A summary of our investment in leased real estate properties is as follows:

	December 31,
	2012			2011
	(in thousands)
Buildings	$	2,580,400		$	2,157,015
Site improvement and equipment		213,471			184,503
Land		244,682			195,521
		3,038,553			2,537,039
Less accumulated depreciation		(580,373	)		(470,420	)
Total	$	2,458,180		$	2,066,619

The future minimum estimated contractual rents due for the remainder of the initial terms of the leases are as follows at December 31, 2012:

	(in thousands)
2013	$	338,520
2014		350,265
2015		355,798
2016		338,398
2017		342,487
Thereafter		1,793,621
Total	$	3,519,089

Below is a summary of the significant transactions that occurred from 2010 to 2012.

Genesis Healthcare

On December 1, 2012, Genesis Healthcare (“Genesis”), an existing operator to Omega, completed the purchase of Sun Healthcare Group (“Sun”), also an existing operator to Omega.  Prior to the purchase, Sun was our second largest tenant with $235 million in leased assets representing 40 facilities located in 10 states.  We leased the 40 facilities to Sun under a master lease with expiration dates in 2013 and 2017.  Prior to the purchase, we also had a master lease with Genesis covering approximately $122 million in leased assets representing 13 facilities located in 5 states.

In connection with the acquisition, on December 1, 2012, we entered into a new 53 facility master lease with Genesis expiring on December 31, 2025.  At December 31, 2012, Genesis was our largest tenant with $357 million in leased assets (approximately 11% of our total gross investments) located in 13 states.

2012 Acquisitions

Arizona and California Acquisitions

During the three-month period ended December 31, 2012, we completed the acquisition of approximately $203.4 million of new investments and leased them back to a new operator.  The investments involved two separate transactions to purchase 14 facilities (12 SNFs, one assisted living facility (“ALF”) and 1 combined SNF/ALF).  The combined transactions consisted of the assumption of approximately $71.9 million of HUD indebtedness and payment of $131.5 million in cash. The $71.9 million of assumed HUD debt is comprised of 8 HUD mortgage loans with a blended interest rate of 5.50% and maturities between April 2031 and February 2045. The 14 facilities, representing 1,830 operating beds, are located in California (10) and Arizona (4). The transaction involved several separate master lease agreements covering all 14 facilities.

Transaction 1 (First Closing):  On November 30, 2012, we purchased four Arizona facilities (2 SNFs, 1 ALF and 1 combined SNF/ALF) for an aggregate purchase price of $60.0 million.  The transaction consisted of the assumption of $27.6 million of indebtedness guaranteed by HUD and $32.4 million in cash.  The blended interest rate on the HUD indebtedness assumed for the Arizona facilities was 4.73%.  The four facilities were simultaneously leased back to a new operator under a new 12 year master lease.

We are in the process of finalizing our fair value allocation and we expect the allocation process to be completed during the first half of 2013.  As of December 31, 2012, we allocated approximately $64.6 million consisting of land ($5.5 million), building and site improvements ($55.9 million), and furniture and fixture ($3.2 million).  We recorded approximately $4.6 million of fair value adjustment related to above market debt assumed based on the terms of comparable debt and other market factors.  We estimate amortization of the fair value adjustment related to the above market debt will average approximately $0.2 million per year for the next five years.  We have not recorded goodwill in connection with this transaction.

Transaction 2 (Second Closing):  In November 2012, we entered into a Purchase and Sales Agreement to purchase and then leaseback 10 California SNFs.  On November 30, 2012, we purchased five SNFs for approximately $70.2 million.  The five SNFs were simultaneously leased back under a new 12 year master lease.

We are in the process of finalizing our fair value allocation and we expect the allocation process to be completed during the first half of 2013.  As of December 31, 2012, we allocated approximately $70.2 million consisting of land ($11.5 million), building and site improvements ($55.5 million), and furniture and fixture ($3.2 million).  We have not recorded goodwill in connection with this transaction.

Transaction 2 (Third Closing):  On December 31, 2012, we purchased the remaining five California SNFs for an aggregate purchase price of $72.2 million (net of purchase price reduction of approximately $1.0 million related to funds escrowed by the seller to reimburse us for costs associated with refinancing some of the assumed HUD debt).  The transaction consisted of the assumption of $44.3 million of HUD indebtedness and $28.9 million in cash.  The blended interest rate on the HUD indebtedness assumed for the five California facilities was 5.97%.  The five SNFs were then leased back to the new operator under new 12 year master leases.

We are in the process of finalizing our fair value allocation and we expect the allocation process to be completed during the first half of 2013.  As of December 31, 2012, we allocated approximately $77.6 million consisting of land ($13.0 million), building and site improvements ($60.9 million), and furniture and fixture ($3.7 million).  We recorded approximately $5.4 million of fair value adjustment related to the above market debt assumed based on the terms of comparable debt and other market factors.  We estimate amortization of the fair value adjustment related to the above market debt will be approximately $0.3 million in 2013 and will average approximately $0.2 million per year from 2014 through 2017.  We have not recorded goodwill in connection with this transaction.

Indiana Acquisitions

In 2012 we completed four transactions in Indiana involving two existing operators and 34 facilities.  The following is a summary of the transactions:

Transaction 1:  On June 29, 2012, we purchased one SNF encompassing 80 operating beds in Indiana for approximately $3.4 million and leased the facility back to an existing operator under an existing master lease.   As of December 31, 2012, we allocated approximately $3.4 million consisting of land ($0.2 million), building and site improvements ($2.9 million), and furniture and fixture ($0.3 million).  We have not recorded goodwill in connection with this transaction.

Transaction 2:  On June 29, 2012, we purchased four facilities encompassing 383 operating beds in Indiana for approximately $21.7 million and leased the facilities to Health and Hospital Corporation.  As of December 31, 2012, we allocated approximately $21.7 million consisting of land ($1.9 million), buildings and site improvements ($18.4 million) and furniture and fixtures ($1.4 million). We have not recorded goodwill in connection with this transaction.

Transaction 3:  On August 31, 2012, we purchased 27 facilities (17 SNFs, four ALFs and six independent living facilities) totaling 2,892 operating beds in Indiana from an unrelated third party for approximately $203 million in cash and assumed a liability associated with the lease of approximately $13.9 million.  Simultaneous with the transaction, we also purchased one parcel of land for $2.8 million.  The purchase price of both (i) 27 facilities and (ii) the parcel of land were funded from cash on hand and borrowings from our credit facility.  The 27 facilities and land parcel were added to an existing master lease.  We are in the process of finalizing our fair value allocation and we expect the allocation process to be completed during the first half of 2013.  As of December 31, 2012, we allocated approximately $219.7 million consisting of land ($16.1 million), building and site improvements ($189.2 million) and furniture and fixture ($14.4 million).  We have not recorded goodwill in connection with this transaction.

Transaction 4:  On December 31, 2012, we purchased two SNFs encompassing 167 operating beds in Indiana for approximately $9.5 million and leased these facilities back to an existing operator under a new consolidated master lease.  We are in the process of finalizing our fair value allocation and we expect the allocation process to be completed during the first half of 2013.  As of December 31, 2012, we allocated approximately $9.5 million consisting of land ($0.6 million), building and site improvements ($8.0 million), and furniture and fixture ($0.9 million).  We have not recorded goodwill in connection with this transaction.

Michigan Acquisition

On November 30, 2012, we purchased one ALF for $20 million from an unrelated third party and added it to an existing master lease with an existing operator.  The 171 operating bed ALF is located in Michigan.  We are in the process of finalizing our fair value allocation and we expect the allocation process to be completed during the first half of 2013.  As of December 31, 2012, we allocated approximately $20.0 million consisting of land ($0.4 million), building and site improvements ($18.9 million), and furniture and fixture ($0.7 million).  We have not recorded goodwill in connection with this transaction.

Texas Acquisition

On October 31, 2012, we purchased one SNF from an unrelated third party encompassing 90 operating beds in Texas for approximately $2.7 million and leased the facility to an existing operator.  We are in the process of finalizing our fair value allocation and we expect the allocation process to be completed during the first half of 2013.  As of December 31, 2012, we allocated approximately $2.7 million consisting of land ($0.2 million), building and site improvements ($2.2 million), and furniture and fixture ($0.3 million).  We have not recorded goodwill in connection with this transaction.

Acquisition costs related to the above transactions were expensed as period costs.  For the year ended December 31, 2012, we expensed $0.9 million of acquisition related expenses.

2011 Acquisitions

During the fourth quarter of 2011, we completed two acquisitions. The first acquisition was comprised of the purchase of four SNFs in Maryland and West Virginia; the second acquisition was comprised of the purchase/leaseback of 17 SNFs in five states, including Arkansas, Colorado, Florida, Michigan and Wisconsin.  Acquisition costs related to the two acquisitions was approximately $1.2 million in 2011 and was expensed.  The following is summary of the transactions and other investments:

2011 First Acquisition (Maryland and West Virginia)

During the fourth quarter of 2011, we purchased and leaseback four SNFs located in Maryland (3) and West Virginia (1), totaling 586 beds for a total investment of $61 million, including approximately $1 million to complete renovations at one facility.  The consideration consisted of $31 million in cash and the assumption of $30 million in HUD – guaranteed indebtedness, which bears an interest rate of 4.87% (weighted-average) and matures between March 2036 and September 2040.

We completed our fair value allocation in 2012.  We allocated approximately $62.7 million consisting of land ($4.4 million), buildings and site improvements ($55.0 million) and furniture and fixtures ($3.3 million).  We funded approximately $1.3 million in renovation costs for one of the facilities acquired in connection with this transaction and completed the renovation during the third quarter of 2012.  We recorded approximately $3.0 million of fair value adjustment related to the above market debt assumed based on the terms of comparable debt.  We estimate amortization will be approximately $0.2 million per year over the next five years. We have not recorded goodwill in connection with this transaction.

2011 Second Acquisition (Arkansas, Colorado, Florida, Michigan and Wisconsin)

On December 23, 2011, we purchased 17 SNFs and leased them back to a new operator, for an aggregate purchase price of $128 million.  The acquisition consisted of the assumption of $71.3 million of indebtedness guaranteed by the Department of Housing and Urban Development (“HUD”) and $56.7 million in cash.

The $71.3 million of assumed HUD debt was comprised of 15 HUD mortgage loans with a blended interest rate of 5.70% and maturities between October 2029 and July 2044.

The 17 SNFs, representing 1,820 operating beds, are located in Arkansas (12), Colorado (1), Florida (1), Michigan (2) and Wisconsin (1). The purchase/leaseback transaction involved two separate master lease agreements covering all 17 SNFs.

We completed our fair value allocation in 2012.  We allocated approximately $129.9 million consisting of land ($9.0 million), buildings and site improvements ($111.5 million) and furniture and fixtures ($9.4 million).  We recorded approximately $1.9 million of fair value adjustment related to the above market debt assumed based on the terms of comparable debt.  We have not recorded goodwill in connection with this transaction.

143 Facility CapitalSource Acquisitions (2009 – 2010)

In November 2009, we entered into a securities purchase agreement (the “CapitalSource Purchase Agreement”) with CapitalSource Inc. (NYSE: CSE) (“CapitalSource”) and several of its affiliates, pursuant to which we agreed to purchase CapitalSource subsidiaries owning 80 long term care facilities, plus an option to purchase CapitalSource subsidiaries owning an additional 63 facilities (the “Option”), for approximately $858 million.  Our acquisition of the CapitalSource subsidiaries pursuant to the terms of the purchase agreement was conducted in three separate closings: (i) on December 22, 2009, we acquired CapitalSource subsidiaries owning 40 long-term care facilities and an option to acquire an additional 63 facilities; (ii) on June 9, 2010, we exercised our option to acquire CapitalSource subsidiaries owning 63 long-term care facilities; and (iii) on June 29, 2010, we acquired CapitalSource subsidiaries owning 40 long-term care facilities.  We accounted for these acquisitions as business combinations.  We incurred approximately $3.1 million in transaction costs for the transactions, of which $1.6 million was expensed during 2009 and $1.5 million was expensed in 2010.

First Closing

On December 22, 2009, we purchased CapitalSource entities owning 40 facilities for approximately $271.4 million and an option to purchase CapitalSource entities owning 63 additional facilities for $25.0 million.  The consideration consisted of: (i) approximately $184.2 million in cash; (ii) 2,714,959 shares of Omega common stock and (iii) the assumption of approximately $59.4 million of 6.8% mortgage debt maturing on December 31, 2011.  We valued the 2,714,959 shares of our common stock at approximately $52.8 million on December 22, 2009.

The 40 facilities represent 5,264 operating beds located in 12 states, and are part of 15 in-place triple net leases among 12 operators.   The 12 leases generate approximately $31 million of annualized revenue.

We allocated approximately $282.0 million consisting of land ($22.5 million), building and site improvements ($241.9 million) and furniture and fixtures ($17.6 million).  We allocated approximately $9.5 million to in-place above market leases assumed at the first closing and approximately $19.8 million to in-place below market leases assumed at the first closing.  In 2010, 2011 and 2012, net amortization associated with net in-place below market leases assumed at the first closing was approximately $1.4 million, $1.3 million and $1.2 million, respectively.

As of December 31, 2012, we estimate the net impact to revenue of amortizing the assumed net in-place below market leases associated with the December 22, 2009 acquisition as follows (in millions):

1 year	1-3 years	3-5 years	Thereafter
$1.2	$2.1	$1.7	$1.8

The fair value of the debt assumed approximated face value.  We did not record goodwill in connection with this transaction.

HUD Portfolio Closing

On June 29, 2010, we purchased CapitalSource entities owning 40 facilities for approximately$271 million.   We also paid approximately $15 million for escrow accounts transferred to us at closing.  The 40 facilities are encumbered by approximately $182 million in long-term mortgage financing guaranteed by the U.S. Department of Housing and Urban Development (“HUD”) and $20 million in subordinated notes.  The following summarizes the consideration paid at closing:

● $65 million in cash;

● $202 million face value of assumed debt, which includes $20 million of 9.0% unsecured debt maturing in December 2021, $53million of HUD debt at a 6.61% weighted average annual interest rate maturing between January 2036 and May 2040, and $129 million of new HUD Debt at a 4.85% annual interest rate maturing between January 2040 and January 2045; and

● 995 thousand shares of our common stock valued at approximately $19 million on June 29, 2010.

The 40 facilities represent 4,882 operating beds located in two states, and are part of 13 in-place triple net leases among two operators.  The 13 leases generate approximately $30 million of annualized revenue.

We allocated approximately $313.3 million consisting of land ($32.3 million), building and site improvements ($264.1 million) and furniture and fixtures ($16.9 million).  We allocated approximately $4.9 million to in-place above market leases assumed and approximately $24.1 million to in-place below market leases assumed at the HUD portfolio closing.  In 2010, 2011 and 2012, net amortization associated with net in-place below market leases assumed at the HUD portfolio closing was approximately$1.9 million, $3.5 million and $3.2 million, respectively.

As of December 31, 2012, we estimate the net impact to revenue of amortizing the assumed net in-place below market leases associated with the June 29, 2010 acquisition as follows (in millions):

1 year	1-3 years	3-5 years	Thereafter
$2.9	$5.1	$0.9	$1.7

In addition, we recorded approximately $22.5 million of fair value adjustment related to the above market debt assumed based on the terms of comparable debt.  In 2010, 2011 and 2012, we amortized approximately $0.7 million, $1.4 million and $1.3 million for the fair value adjustment, respectively.  We estimate amortization will average approximately $1.2 million per year for the next five years.  We did not record goodwill in connection with this transaction.

Option Exercise and Closing

On April 20, 2010, we provided notice of our intent to exercise our Option to acquire CapitalSource entities owning 63 facilities.  On June 9, 2010, we completed our purchase of the 63 CapitalSource facilities for an aggregate purchase price of approximately $293 million in cash.  The total purchase price including the purchase option deposit was $318 million.

The 63 facilities represent 6,607 operating beds located in 19 states, and are part of 30 in-place triple net leases among 18 operators. The 30 leases generate approximately $34 million of annualized revenue.

We allocated approximately $328.9 million consisting of land ($35.8 million), building and site improvements ($276.0 million) and furniture and fixtures ($17.1 million).  We allocated approximately $8.2 million to in-place above market leases assumed and approximately $18.8 million to in-place below market leases assumed at the Option portfolio closing.  In 2010, 2011 and 2012, net amortization associated with net in-place below market leases assumed at the Option portfolio closing was approximately $0.7 million, $1.3 million and $0.9 million, respectively.

As of December 31, 2012, we estimate the net impact to revenue of amortizing the assumed net in-place below market leases associated with the June 9, 2010 acquisition as follows:

1 year	1-3 years	3-5 years	Thereafter
$1.0	$2.4	$1.9	$2.5

We did not record goodwill in connection with this transaction.

The facilities acquired in 2011 and 2012 are included in our results of operations from the date of acquisition.  The following unaudited pro forma results of operation reflect the impact of the transactions as if they occurred on January 1, 2011.  In the opinion of management, all significant necessary adjustments to reflect the effect of the acquisition have been made.  The following pro forma information is not indicative of future operations.

	Pro Forma
	Year Ended December 31,
	2012		2011
	(in thousands, except per share amount, unaudited)
Revenues	$	393,484	$	366,344
Net income available to common stockholders		138,644		74,975
Earnings per share – diluted:
Net income available to common stockholders – as reported	$	1.12	$	0.46
Net income available to common stockholders – pro forma	$	1.28	$	0.73

Connecticut Properties

In January 2011, at our request, a complaint was filed by the State of Connecticut, Commissioner of Social Services (the “State”) against the licensees/operators of four Connecticut SNFs, seeking the appointment of a receiver.  The facilities were leased and operated by affiliates of FC/SCH Capital, LLC (“FC/SCH”) and were managed by Genesis Healthcare (“Genesis”), and had approximately 472 licensed beds as of March 31, 2011.  The Superior Court, Judicial District of Hartford, Connecticut (the “Court”) appointed a receiver.

The receiver was responsible for (i) operating the facilities and funding all operational expenses incurred after the appointment of the receiver and (ii) for providing the Court with recommendations regarding the facilities.  In March 2011, the receiver moved to close all four SNFs and we objected.  At the hearing held on April 21, 2011, we stated our position that the receiver failed to comply with the statutory requirements prior to recommending the facilities’ closure.  In addition, alternative operators expressed interest in operating several of the facilities.  On April 27, 2011, the Court granted the receiver’s motion and ordered the facilities closed.

We timely filed our notice of appeal, taking the position that the Court’s Order was final and appealable, and erroneous.  Following our notice of appeal, we negotiated a stipulation with the State and the receiver which afforded us significant concessions.  Those concessions included: (a) an agreed recognition of us as a secured lienholder with a priority claim, (b) an accelerated timeframe for the (i) allocation by the receiver of collected funds between pre- and post- receivership periods, and (ii) disbursement to us of pre-receivership funds collected, and (c) an agreement by the State that it would forego its right to seek recoupment of pre-receivership funds as reimbursement for post-receivership advances.  In exchange for these concessions (among others), we withdrew our appeal.

           As a result of these developments, during the three month period ended March 31, 2011, we recorded an impairment charge of $24.4 million to reduce the carrying values of the Connecticut SNFs to their estimated fair values.  We estimated the fair value of these facilities based on the facilities’ potential sales value assuming that the facilities would not be used as SNFs.  As of November 1, 2011, all of the residents of the four facilities had been relocated and the receiver surrendered possession of all of the facilities to us.  In 2011, we classified these facilities as held-for-sale.  We are actively marketing the last of the four facilities for sale (for purposes other than the provision of skilled nursing care).

FC/SCH Facilities

During the second quarter of 2011, we entered into a master transition agreement (“2011 MTA”) with one of our current lessee/operators and a third party lessee/operator to transition the facilities from the current operator to the new operator.  The 2011 MTA closing was subject to receipt of healthcare regulatory approvals from several states for the operating license transfer from the current operator to the new operator.  On January 1, 2012, regulatory approval was provided and the former lease was terminated and a new operator entered into a new twelve-year master lease for the facilities.  As a result of the 2011 MTA, during the second quarter of 2011, we evaluated the recoverability of the straight-line rent and lease inducements associated with the current lease and recorded a $4.1 million provision for uncollectible accounts associated with straight-line receivables and lease inducements.

Assets Sold or Held for Sale

For the year ended December 31, 2012, we sold nine facilities for total cash proceeds of $29.0 million, generating approximately an $11.8 million accounting gain.  Three of the facilities sold were part of the Connecticut properties discussed above.  Two of the facilities sold were the result of lessees exercising their purchase option.  The sale of the other four facilities was the result of portfolio reconfiguration.

At December 31, 2012, we had two SNFs and one parcel of land classified as held-for-sale with an aggregate net book value of approximately $1.0 million.