OMEGA HEALTHCARE INVESTORS INC (Form: 10-Q, Received: 08/06/2014 10:15:35)

As noted in Note 2 – Properties and Investments, on June 27, 2014 we purchased two facilities located in Georgia and South Carolina. The agreement included an additional facility which we purchased on July 31, 2014 for $17.3 million and added to our master lease.

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

Forward-looking Statements, Reimbursement Issues and Other 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 Item 1A to our annual report on Form 10-K for the year ended December 31, 2013 and in Part II, Item 1A of this report (if any);

(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 operators in bankruptcy to reject unexpired lease obligations, modify the terms of our mortgages and impede our ability to collect unpaid rent or interest during the process of a bankruptcy proceeding and retain security deposits for the debtors’ obligations;

(iv)

our ability to sell closed or foreclosed assets on a timely basis and on terms that allow us to realize the carrying value of these assets;

(v)

our ability to negotiate appropriate modifications to the terms of our credit facilities;

(vi)

our ability to manage, re-lease or sell any owned and operated facilities;

(vii)

the availability and cost of capital;

(viii)

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

(ix)

competition in the financing of healthcare facilities;

(x)

regulatory and other changes in the healthcare sector;

(xi)

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

(xii)

changes in the financial position of our operators;

(xiii)

changes in interest rates;

(xiv)

the amount and yield of any additional investments;

(xv)

changes in tax laws and regulations affecting real estate investment trusts; and

(xvi)

our ability to maintain our status as a real estate investment trust.

Overview

We have one reportable segment consisting of investments in healthcare related real estate properties. Our core business is to provide financing and capital to the long-term healthcare industry with a particular focus on skilled nursing facilities (“SNFs”) located in the United States. Our core portfolio consists of long-term leases and mortgage agreements. All of our leases are “triple-net” leases, which require the tenants to pay all property-related expenses. Our mortgage revenue derives from fixed-rate mortgage loans, which are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor.

Our portfolio of investments at June 30, 2014, consisted of 564 healthcare facilities (including one facility that is closed/held for sale), located in 38 states and operated by 49 third-party operators. Our gross investment in these facilities totaled approximately $4.3 billion at June 30, 2014, with 99% of our real estate investments related to long-term healthcare facilities. Our portfolio is made up of (i) 477 SNFs, (ii) 19 assisted living facilities (“ALFs”), (iii) 11 specialty facilities, (iv) fixed rate mortgages on 54 SNFs and two ALFs and (v) one SNF that is closed/held for sale. At June 30, 2014, we also held other investments of approximately $56.1 million, consisting primarily of secured loans to third-party operators of our facilities.

Our consolidated financial statements include the accounts of (i) Omega and (ii) all direct and indirect wholly owned subsidiaries of Omega. All inter-company accounts and transactions have been eliminated in consolidation of the financial statements.

Taxation

We have elected to be taxed as a Real Estate Investment Trust (“REIT”), under Sections 856 through 860 of the Internal Revenue Code (the “Code”), beginning with our taxable year ended December 31, 1992. We believe that we have been organized and operated in such a manner as to qualify for taxation as a REIT. We intend to continue to operate in a manner that will maintain our qualification as a REIT, but no assurance can be given that we have operated or will be able to continue to operate in a manner so as to qualify or remain qualified as a REIT. Under the Code, we generally are not subject to federal income tax on taxable income distributed to stockholders if certain distribution, income, asset and stockholder tests are met, including a requirement that we must generally distribute at least 90% of our annual taxable income, excluding any net capital gain, to stockholders. If we fail to qualify as a REIT in any taxable year, we may be subject to federal income taxes on our taxable income for that year and for the four years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. For further information, see “Taxation” in Item 1 of our annual report on Form 10-K for the year ended December 31, 2013.

Government Regulation and Reimbursement

The health care 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. See “ Item 1A – Risk Factors .” The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.

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”). We expect additional rules, regulations and interpretations under the Healthcare Reform Law that may materially affect our operators’ financial condition and operations. For example, although the U.S. Supreme Court has upheld the Healthcare Reform Law (other than the requirement that states expand Medicaid beginning in 2014), the Healthcare Reform Law and the implementation thereof continue to receive challenge and scrutiny from Congress, state attorneys general and legislators, and private individuals and organizations. In addition, certain measures recently taken under the authority of, or in connection with, the Healthcare Reform Law may lead to additional modification and/or clarification in the future, including the following:

● On January 3, 2013, a new federal Commission on Long-Term Care was established and tasked with developing a plan for the establishment, implementation and financing of a high-quality system to provide long-term care services. In September 2013, the Commission released a report with 38 proposals for legislative and administrative actions to promote the establishment and financing of a long-term care services system that will ensure the availability of such services to those who need them. The Commission recommended creating a national advisory committee and convening a 2015 White House Conference on aging.

● The Healthcare Reform Law requires private health insurers that sell policies to individuals and small businesses to provide, starting in 2014, a set of “essential health benefits” in ten categories, including prescription drugs, rehabilitative and habilitative services, and chronic disease management. As required under the law, each state has defined the essential health benefits required in that state.

● The Healthcare Reform Law requires SNFs to implement a compliance and ethics program that is effective in preventing and detecting criminal, civil and administrative violations and in promoting quality of care. The Department of Health and Human Services (“HHS”) has not yet issued the proposed regulations to implement this law that were due in March 2012.

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. The Healthcare Reform Law could result in decreases in payments to our operators or otherwise adversely affect the financial condition of our operators, thereby negatively impacting our financial condition. Our operators may not be successful in modifying their operations to lessen the impact of any increased costs or other adverse effects resulting from changes in governmental programs, private insurance and/or employee welfare benefit plans. The impact of the Healthcare Reform Law on each of our operators will vary depending on payor mix, resident conditions and a variety of other factors. In addition to the provisions relating to reimbursement, other provisions of the Healthcare Reform Law may impact our operators as employers (e.g., requirements related to providing health insurance for employees). We anticipate that many of the provisions in the Healthcare Reform Law may be subject to further clarification and modification during the rule making process.

Reimbursement Generally . A significant portion of our operators’ revenue is derived from governmentally-funded reimbursement programs, consisting primarily of Medicare and Medicaid. In recent years, the federal government and many state governments have focused on reducing expenditures under the Medicare and Medicaid programs, resulting in significant cost-cutting at both the federal and state levels. These cost-cutting measures, together with the implementation of changes in reimbursement rates such as those described below, could result in a significant reduction of reimbursement rates to our operators under both the Medicare and Medicaid programs.

On April 1, 2014, President Obama signed the “Protecting Access to Medicare Act of 2014” which calls for HHS to develop a value based purchasing program for SNFs aimed at lowering readmission rates. Beginning in 2018, 2% of SNFs’ Medicare payments could be withheld and about 70% of those dollars would be distributed to SNFs with reduced hospital readmissions.

We currently believe that our operator coverage ratios are adequate and that our operators can absorb moderate reimbursement rate reductions and still meet their obligations to us. However, significant limits on the scopes 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, 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 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 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 for Medicaid coverage to be expanded to all individuals under age 65 with incomes up to 133% of the federal poverty level, beginning January 1, 2014. The federal government will pay the entire cost for Medicaid coverage for newly eligible beneficiaries for 3 years (2014 through 2016). In 2017, the federal share declines to 95%; in 2018, to 94%; in 2019, to 93%; and in 2020 and subsequent years, to 90%. Pursuant to the law, states may delay Medicaid expansion after 2014, but the federal payment rates will be less.

However, on June 28, 2012, the Supreme Court ruled that states could not be required to expand Medicaid or risk losing federal funding of their existing Medicaid programs. Approximately half of the states have expanded or are expanding in 2014 Medicaid coverage as contemplated by the Healthcare Reform Law, with many of the remaining states involved in a variety of legislative proposals or discussions. HHS has stated that it will consider a limited number of premium assistance demonstration programs from states that want to privatize Medicaid expansion. States must provide a choice between at least two qualified health plans that offer very similar benefits as those required by the health insurance exchanges. Arkansas became the first state to obtain federal approval to use Medicaid funding to purchase private insurance for low-income residents. Iowa and Michigan have also secured waivers, and three other states have pending waivers for alternative Medicaid expansion plans.

Medicare . The Center for Medicaid and Medicare Services (“CMS”) estimates that aggregate Medicare payments to SNFs will increase by $750 million, or 2.0%, for the federal fiscal year that begins October 1, 2014 relative to payments in the prior federal fiscal year. This estimated increase is attributable to a 2.5% market based increase, reduced by a 0.5% multifactor productivity adjustment required by law.

Provisions contained in the American Taxpayer Relief Act (“ATRA”) of 2012, known colloquially as the fiscal cliff deal, are designed to reduce Medicare payments to SNFs by an estimated $600 million during 2012 to 2022. It also reduces payments for multiple procedures or therapies provided on the same day, which will result in approximately $1.8 billion savings to Medicare over the next 10 years, which will impact SNFs as well. Under ATRA, sequestration cuts impacting domestic and defense spending became effective March 1, 2013. Although Medicaid is exempted from the sequestration cuts, they included a 2% cut in payments to Medicare providers and suppliers, which amounted to an estimated $11.3 billion in cuts in federal fiscal year 2013. The Bipartisan Budget Act of 2013 provides for $63 billion in sequestration relief in federal fiscal years 2014 and 2015 which will be split evenly between defense and nondefense programs. It is unknown how Medicare will be impacted.

The “Protecting Access to Medicare Act of 2014” also extended the Medicare therapy cap exceptions process through March 31, 2015. The statutory Medicare Part B outpatient cap for occupational therapy is $1,920 for 2014, and the combined cap for physical therapy and speech therapy is also $1,920 for 2014. These caps do not apply to therapy services covered under Medicare Part A for SNFs, although the caps apply in most other instances involving patients in SNFs or long-term care facilities who receive therapy services covered under Medicare Part B. The exception process permits medically necessary therapy services beyond the cap limits. Expiration of the therapy cap exceptions process in the future could have a material adverse effect on our operators’ financial condition and operations, which could adversely impact their ability to meet their obligations to us.

Quality of Care Initiatives . The CMS has implemented a number of initiatives focused on the quality of care provided by nursing homes that could affect our operators. For instance, in December 2008, the CMS released quality ratings for all of the nursing homes that participate in Medicare or Medicaid. 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. We cannot predict what changes, if any, CMS will make to the rating system. It is possible that this 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.

CMS has incorporated hospital readmissions review into the Quality Indicators Survey. Under Medicare’s Inpatient Prospective Payment System, CMS began adjusting payments to hospitals for excessive readmissions of patients for heart attacks, heart failure and pneumonia during fiscal years beginning on and after October 1, 2012. Long term care facilities will be under increased scrutiny to prevent residents from being readmitted to hospitals for these conditions in particular, and have an opportunity to demonstrate their quality of care by reducing their hospital readmission rates. It is anticipated that hospital readmissions will be a consideration in the future in the CMS five-star rating system.

Office of the Inspector General Activities . The Office of Inspector General’s (the “OIG”) Work Plan for government fiscal year 2014, which describes projects that the OIG plans to address during the fiscal year, includes a number of projects related to nursing homes. Reviews of Medicare Part A and Part B payments and services for SNFs will focus on the following: (1) Medicare Part A billing; (2) billing patterns for Part B services; (3) state agency verification of deficiency corrections; (4) background checks for employees; and (5) hospitalization of residents for manageable and preventable conditions. The OIG will also continue its efforts in addressing fraud and abuse. While we cannot predict the results of the OIG’s activities, the projects could result in further scrutiny and/or oversight of nursing homes.

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. In addition, federal and state governments are devoting increasing attention and resources to anti-fraud initiatives against healthcare providers.

The federal anti-kickback statute is a criminal statute that prohibits the knowing and willful offer, payment, solicitation or receipt of any remuneration in return for, to induce or to arrange for the referral of individuals for any item or service payable by a federal or state healthcare program. There is also a civil analogue. States also have enacted similar statutes covering Medicaid payments, and some states have broader statutes. Some enforcement efforts have targeted relationships between SNFs and ancillary providers, relationships between SNFs and referral sources for SNFs and relationships between SNFs and facilities for which the SNFs serve as referral sources. The federal self-referral law, commonly known as the “Stark Law,” is a civil statute that prohibits a physician from making referrals to an entity for “designated health services” if the physician has a financial relationship with the entity. Some of the services provided in SNFs are classified as designated health services. There are also 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. In addition, the federal False Claims Act allows a private individual with knowledge of fraud to bring a claim on behalf of the federal government and earn a percentage of the federal government’s recovery. Because of these incentives, these so-called “whistleblower” suits have become more frequent. The violation of any of these laws or regulations by an operator may result in the imposition of fines or other penalties, including exclusion from Medicare, Medicaid and all other federal and state healthcare programs.

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, and the corresponding regulations promulgated thereunder (“HIPAA”). On January 25, 2013, the Office for Civil Rights issued a final rule modifying HIPAA to increase the requirements on our operators. Some of the new requirements include, among other things: making business associates subject to the HIPAA Privacy and Security Rules which will require new business associate agreements; changes in determining whether a breach of unsecured protected health information occurred; new requirements for the Notice of Privacy Practices; and decreasing the time to disclose protected health information and requiring disclosures to be electronic under certain conditions. HHS has been conducting audits of covered entities to evaluate compliance with HIPAA, and has announced that in 2014 it will continue its audit program which will also include business associates and will focus on security risk assessments.

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 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.

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.

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 long term care providers, there have been national efforts to outlaw the use of pre-dispute arbitration agreements in long term care settings. At least one state is allowing residents to sue a SNF for failing to comply with staffing quality measures. All of these factors have a potential impact on liability costs of our operators, which could adversely affect our operators’ ability to meet their obligations to us.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), 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, 2013. 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 difference may be material to the consolidated financial statements. We have described our most critical accounting policies in our 2013 Annual Report on Form 10-K in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recent Accounting Pronouncements

Discontinued Operations

In April 2014, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update No 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modified related disclosure requirements. Under the new guidance, a discontinued operation is defined as: (i) a disposal of a component or group of components that is disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of acquisition. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity.

The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. The guidance is effective for annual periods beginning on or after December 15, 2014 and interim periods within that year. Early adoption is permitted, and calendar year-end companies may early adopt the guidance in the first quarter of 2014, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. We have chosen to adopt the guidance effective January 1, 2014 and determined that the adoption had no impact on our consolidated financial statements.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We will be required to apply the new standard in the first quarter of 2017 and are assessing whether the new standard will have a material effect on our financial position or results of operations.

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, 2014 and 2013

Operating Revenues

Our operating revenues for the three months ended June 30, 2014, totaled $121.8 million, an increase of $19.3 million over the same period in 2013. The $19.3 million increase was primarily the result of: (i) approximately $14.1 million of direct financing lease revenue associated with a direct financing lease agreement we entered into with the Ark Holding Company, Inc. in November 2013, now known as New Ark Investment, Inc. (“New Ark”), (ii) $2.5 million increase in mortgage interest income primarily due to the $112.5 million mortgage we entered into with an existing operator during the first quarter of 2014 and (iii) additional $3.2 million rental income associated with acquisitions and lease amendments made throughout the second half of 2013 and first half of 2014.

Operating Expenses

Operating expenses for the three months ended June 30, 2014, totaled $42.0 million, an increase of approximately $4.2 million over the same period in 2013. The increase was primarily due to: (i) $2.7 million provision for uncollectible receivables related to (i) a write-off of an effective yield interest receivable related to the refinancing (termination) of a mortgage receivable and (ii) a write-off of a straight-line receivable related to the transition of two facilities from an existing operator to a new operator, (ii) $1.6 million provision for impairments on real estate properties and (iii) $0.8 million in general and administrative expense offset by $0.9 million of reduced depreciation and amortization expense. The increase in general and administrative expense included an increase of approximately $0.8 million of additional stock based compensation expense related to the new incentive stock plan. The decrease in depreciation expense is the result of shorter lived assets acquired over the past few years becoming fully depreciated.

Other Income (Expense)

For the three months ended June 30, 2014, total other expenses were $33.0 million, an increase of approximately $18.5 million over the same period in 2013. The increase was primarily the result of an increase of approximately $4.5 million in interest expense due to an increase in borrowings outstanding and write-off of approximately $2.6 million of deferred financing costs associated with the termination of the Company’s 2012 Credit Facilities. In 2013, we recorded an $11.1 million gain related to the early extinguishment of debt in May 2013.

Six Months Ended June 30, 2014 and 2013

Operating Revenues

Our operating revenues for the six months ended June 30, 2014, totaled $242.8 million, an increase of $38.5 million over the same period in 2013. The $38.5 million increase was primarily the result of: (i) approximately $28.2 million of direct financing lease revenue associated with a direct financing lease agreement we entered into with New Ark in November 2013, (ii) $4.5 million increase in mortgage interest income primarily due to the new mortgage we entered into in the first quarter of 2014 and (iii) additional $6.0 million rental income associated with acquisitions and lease amendments made throughout the second half of 2013 and first half of 2014 offset by a $0.2 million decrease in other investment income primarily related to a mezzanine loan paid off in December 2013.

Operating Expenses

Operating expenses for the six months ended June 30, 2014, totaled $80.0 million, an increase of approximately $4.9 million over the same period in 2013. The increase was primarily due to: (i) $2.7 million provision for uncollectible receivables related to (i) a write-off of an effective yield interest receivable related to the refinancing (termination) of a mortgage receivable and (ii) a straight-line receivable related to the transition of two facilities from an existing operator to a new operator, (ii) $2.1 million in general and administrative expense and (iii) $1.6 million provision for impairment on real estate properties offset by $1.4 million of reduced depreciation and amortization expense. The increase in general and administrative expense included an increase of approximately $1.6 million of additional stock based compensation expense related to the new incentive stock plan. The decrease in depreciation expense is the result of shorter lived assets acquired over the past few years becoming fully depreciated.

Other Income (Expense)

For the six months ended June 30, 2014, total other expenses were $63.1 million, an increase of approximately $22.2 million over the same period in 2013. The increase was primarily the result of: (i) an increase of approximately $5.9 million in interest expense due to an increase in borrowings outstanding and (ii) $4.7 million interest refinancing charge associated with (a) $2.6 million write-off of in deferred financing costs associated with the termination of our previous $700 million senior unsecured credit facility (the “2012 Credit Facilities”) and (b) $2.0 million write-off of deferred financing costs associated with the termination of our 2013 Term Loan Facility as defined under “Repayment of $200 Million Term Loan” below. In 2013, we recorded an $11.1 million gain related to the early extinguishment of debt in May 2013.

Funds From Operations

Our funds from operations available to common stockholders (“FFO”), for the three months ended June 30, 2014, was $79.7 million, compared to $82.4 million, for the same period in 2013. Our FFO for the six months ended June 30, 2014 was $164.1 million, compared to $152.5 million for the same period in 2013.

We calculate and report FFO in accordance with the definition and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“NAREIT”), and, consequently, FFO is defined as net income available to common stockholders, adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets. We believe that 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. The term FFO was designed by the real estate industry to address this issue. FFO herein is not necessarily comparable to FFO of other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us.

FFO is a non-GAAP financial measure. We use FFO as one of several criteria to measure 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, 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 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 FFO results for the three- and six- months periods ended June 30, 2014 and 2013:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014			2013
	(in thousands)

Net income available to common stockholders	$	46,817	$	49,058	$	102,646		$	87,178
Add back loss (deduct gain) from real estate dispositions		—		1,151		(2,883	)		1,151
Sub-total		46,817		50,209		99,763			88,329
Elimination of non-cash items included in net income:
Depreciation and amortization		31,301		32,225		62,745			64,184
Add back impairments on real estate properties		1,558		—		1,558			—
Funds from operations available to common stockholders	$	79,676	$	82,434	$	164,066		$	152,513

Portfolio and Recent Developments

$415 Million of New Investment in Q2 2014

On June 30, 2014, we entered into an agreement to refinance/consolidate $117 million in existing mortgages on 17 facilities into one mortgage and simultaneously provide mortgage financing for an additional 14 facilities. The new $415 million mortgage is secured by 31 facilities totaling 3,430 licensed beds all located in the state of Michigan. The new loan bears an initial annual cash interest rate of 9.0% and increases by 0.225% per year (e.g., beginning in year 2 the interest rate will be 9.225%, in year 3 the rate will be 9.45%, etc.).

One of the existing mortgages that was refinanced/consolidated into the new $415 million mortgage included annual interest rate escalators and required the mortgagee to pay a prepayment penalty in the event the mortgage was retired early which required us to record an effective yield interest receivable. In connection with the refinancing/consolidating transaction which was entered into at market terms, the old mortgage was considered to be retired early since the modifications made to the terms of the mortgage are more than minor. As on the date of the refinancing/consolidation transaction, the effective yield interest receivable was approximately $2.0 million. We forgave the prepayment penalty associated with the retired mortgage and recorded a $2.0 million provision to write-off the effective yield interest receivable related to the retired mortgage.

$17.3 Million of New Investment in Q2 2014

On June 27, 2014, we purchased two SNFs from an unrelated third party for approximately $17.3 million and leased them to an existing operator of Omega. The SNFs, located in Georgia and South Carolina, totaling 213 beds, were combined into a 12 year master lease with an initial cash yield of 9.5%.

The master lease allows for the purchase of a third facility located in South Carolina. We expect to purchase the third facility during the third quarter of 2014 and add it to the master lease. The combined purchase price, including the third facility, will be $34.6 million.

$113 Million of New Investment in Q1 2014

On January 17, 2014, we entered into a $112.5 million first mortgage loan with an existing operator of Omega. The loan is secured by 7 SNFs and 2 ALFs totaling 784 operating beds located in Pennsylvania (7) and Ohio (2). The loan is cross-defaulted and cross-collateralized with our existing master lease with the operator. The loan bears an initial annual cash interest rate of 9.5% and matures in January 2024.

$4.7 Million of New Investment in Q1 2014

O n January 30, 2014, we acquired an ALF in Arizona from an unrelated third party for approximately $4.7 million. The operations of the 90 bed facility were transitioned to an existing operator of Omega.

Assets Sold and Closures

For the three-month period ended June 30, 2014, we sold a parcel of undeveloped land in Texas to a third party for approximately $0.3 million. We also closed a 75 bed developmentally disability facility in Indiana and recorded a $1.6 million impairment charge to reduce the carrying value of the facility to its estimated fair value based upon estimated future cash flows.

In first quarter of 2014, we sold one SNF in Louisiana for approximately $1.0 million, resulting in a $0.8 million gain. We also sold two closed held-for-sale SNFs for total cash proceeds of $2.6 million, generating approximately a $2.1 million gain.

Assets Held for Sale

At June 30, 2014, we had one SNF and one parcel of land classified as held-for-sale with an aggregate net book value of approximately $0.8 million.

Liquidity and Capital Resources

At June 30, 2014, we had total assets of $3.9 billion, stockholders’ equity of $1.4 billion and debt of $2.4 billion, representing approximately 63.0% of total capitalization.

Financing Activities and Borrowing Arrangements

Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants. As of December 31, 2013 and June 30, 2014, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

Bank Credit Agreements

On June 27, 2014, we entered into a new $1.2 billion unsecured credit facility, comprised of a $1 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) and a $200 million senior unsecured term loan facility (the “Term Loan Facility” and, collectively, the “2014 Credit Facilities”).

The 2014 Credit Facilities replace our previous $700 million 2012 Credit Facilities. The 2014 Credit Facilities include an “accordion feature” that permits us to expand our borrowing capacity by $550 million, for maximum aggregate commitments of up to $1.75 billion.

The Revolving Credit Facility is priced at LIBOR plus an applicable percentage (beginning at 130 basis points, with a range of 92.5 to 170 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings, plus a facility fee based on the same ratings (initially 25 basis points, with a range of 12.5 to 30 basis points). The Revolving Credit Facility will be used for acquisitions and general corporate purposes. At June 30, 2014, we had $270 million in borrowings outstanding under the Revolving Credit Facility. The Revolving Credit Facility matures on June 27, 2018, subject to a one-time option by us to extend such maturity date by one year.

The Term Loan Facility is also priced at LIBOR plus an applicable percentage (beginning at 150 basis points, with a range of 100 to 195 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. At June 30, 2014, we had $200 million in borrowings outstanding under the Term Loan Facility. The Term Loan Facility matures on June 27, 2019.

For the three month period ended June 30, 2014, we recorded a non-cash charge of approximately $2.6 million relating to the write-off of unamortized deferred financing costs associated with the termination of the 2012 Credit Facilities .

Repayment of $200 Million Term Loan

On December 27, 2013, we entered into a new $200 million senior unsecured, deferred draw, term loan facility (the “2013 Term Loan Facility”) that was scheduled to mature on February 29, 2016.

The 2013 Term Loan Facility was priced at LIBOR plus an applicable percentage (beginning at 175 basis points, with a range of 110 to 230 basis points) based on our ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings.

In January 2014, we drew all $200 million under the 2013 Term Loan Facility and used the proceeds to (i) fund a new mortgage investment and (ii) repay outstanding borrowings under the 2012 Revolving Credit Facility. In March 2014, we paid off and terminated the 2013 Term Loan Facility with proceeds from the sale of our 4.95% Senior Notes due 2024 (see below). In addition, we recorded a non-cash charge of approximately $2.0 million relating to the write-off of deferred financing costs associated with the termination of the 2013 Term Loan Facility.

Issuance of $400 Million of Senior Notes

On March 6, 2014, we sold $400 million aggregate principal amount of our 4.95% Senior Notes due 2024. These notes were sold at an issue price of 98.58% of the principal amount of the notes, before the initial purchasers’ discount resulting in gross proceeds of approximately $394.3 million. We used the net proceeds of the offering to repay in full our $200 million 2013 Term Loan Facility and a portion of our indebtedness outstanding under our 2012 Revolving Credit Facility.

$250 Million Equity Shelf Program

On March 18, 2013, we entered into separate Equity Distribution Agreements (collectively, the “2013 Equity Shelf Agreements”) to sell shares of our common stock having an aggregate gross sales price of up to $250 million (the “2013 Equity Shelf Program”) with several financial institutions, each as a sales agent and/or principal (collectively, the “Managers”).

For the three-month period ended June 30, 2014, we issued approximately 0.9 million shares under the 2013 Equity Shelf Program, at an average price of $35.18 per share, generating gross proceeds of approximately $30.0 million, before $0.6 million of commissions. For the six-month period ended June 30, 2014, we issued approximately 1.7 million shares under the 2013 Equity Shelf Program, at an average price of $34.06 per share, generating gross proceeds of approximately $58.5 million, before $1.2 million of commissions.

Dividend Reinvestment and Common Stock Purchase Plan

For the three-month period ended June 30, 2014, approximately 0.4 million shares of our common stock at an average price of $35.17 per share were issued through our Dividend Reinvestment and Common Stock Purchase Program for gross proceeds of approximately $14.3 million. For the six-month period ended June 30, 2014, approximately 1.4 million shares of our common stock at an average price of $32.76 per share were issued through our Dividend Reinvestment and Common Stock Purchase Program for gross proceeds of approximately $45.8 million.

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, 2014, we paid total dividends of $63.8 million and $125.5 million, respectively.

On July 15, 2014, the Board of Directors declared a common stock dividend of $0.51 per share, increasing the quarterly common dividend by $0.01 per share over the previous quarter. The common dividends are to be paid August 15, 2014 to common stockholders of record on July 31, 2014.

Liquidity

We believe our liquidity and various sources of available capital, including cash from operations, our existing availability under our 2014 Credit Facilities and expected proceeds from mortgage 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;

● 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; and (iv) general and administrative expenses. The timing, source and amount of cash flows provided by financing activities and used 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 and cash equivalents totaled $28.7 million as of June 30, 2014, an increase of $26.1 million as compared to the balance at December 31, 2013. The following is a discussion of changes in cash and cash equivalents due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.

Operating Activities – Operating activities generated $166.8 million of net cash flow for the six months ended June 30, 2014, as compared to $121.3 million for the same period in 2013, an increase of $45.5 million. The increase was primarily due to the additional cash flow generated from new investments, including the facilities acquired and leased throughout 2013 and first half of 2014 as well as the new investments in mortgage financing.

Investing Activities – Net cash flow from investing activities was an outflow of $440.3 million for the six months ended June 30, 2014, as compared to an outflow of $45.0 million for the same period in 2013. The $395.3 million increase in cash outflow from investing activities relates primarily to the $410.8 million of net mortgage investment made in 2014 compared to $2.6 million during the same period in 2013. In 2014, we also acquired several facilities for a total of $22.0 million. Offsetting the increases of the cash outflow were: (i) a decrease of $24.3 million in other investment activity compared to the same period in 2013, (ii) an increase of $1.6 million in proceeds from the sale of real estate in 2014 compared to the same period in 2013 and (iii) a decrease of $8.9 million in our capital renovation program investment compared to the same period of 2013.

Financing Activities – Net cash flow from financing activities was an inflow of $299.6 million for the six months ended June 30, 2014 as compared to an outflow of $71.0 million for the same period in 2013. The $370.7 million change in financing activities was primarily a result of: (i) an increase in proceeds of $535.0 million in long term borrowings including (a) cash proceeds of $394 million from our 4.95% Senior Notes due 2024 issued in March 2014; (b) cash proceeds of $200 million on the 2013 Term Loan Facility in the first quarter of 2014, as compared to (c) $59.4 million proceeds from HUD debt refinancing during the first quarter of 2013 and (ii) an increase in net proceeds of $4.2 million from our dividend reinvestment plan compared to the same period in 2013 offset by an increase of $90.3 million in payments of long term borrowings primarily due to early extinguishment of $200 million 2013 Term Loan Facility during the first quarter of 2014 as compared to a $60 million HUD mortgage refinance payoff including routine HUD debt principal in the first quarter of 2013 and $51.0 million related to the outstanding principal of the 11 HUD mortgages and a decrease in net proceeds of $41.1 million from our common stock issued through our Equity Shelf Program compared to the same period in 2013. In addition, our outflow from dividend payments increased by $21.5 million due to an increase in number of shares outstanding and an increase of $0.08 per share in the common dividends.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

There have been 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, 2013.

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, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2014.

There were no changes in our 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.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

See Note 11 – Litigation to the Consolidated Financial Statements in Part I, Item 1 hereto, which is hereby incorporated by reference in response to this item.

Item 1A – Risk Factors

We filed our Annual Report on Form 10-K for the year ended December 31, 2013, with the Securities and Exchange Commission on February 11, 2014, which sets forth our risk factors in Item 1A therein. We have not experienced any material changes from the risk factors previously described therein.

Item 6–Exhibits

	Exhibit No.
	4.1A			Eleventh Supplemental Indenture, dated as of February 14, 2014, among Omega Healthcare Investors, Inc., each of the subsidiary guarantors listed therein and U.S. Bank National Association, as trustee, relating to the 7.50% Senior Notes due 2020.*
	4.1B			Twelfth Supplemental Indenture, dated as of June 27, 2014, among Omega Healthcare Investors, Inc., each of the subsidiary guarantors listed therein and U.S. Bank National Association, as trustee, relating to the 7.50% Senior Notes due 2020.*
	4.2A			Ninth Supplemental Indenture, dated as of February 14, 2014, among Omega Healthcare Investors, Inc., each of the subsidiary guarantors listed therein and U.S. Bank National Association, as trustee, relating to the 6.75% Senior Notes due 2022.*
	4.2B			Tenth Supplemental Indenture, dated as of June 27, 2014, among Omega Healthcare Investors, Inc., each of the subsidiary guarantors listed therein and U.S. Bank National Association, as trustee, relating to the 6.75% Senior Notes due 2022.*
	4.3A			Seventh Supplemental Indenture, dated as of February 14, 2014, among Omega Healthcare Investors, Inc., each of the subsidiary guarantors listed therein and U.S. Bank National Association, as trustee, relating to the 5.875% Senior Notes due 2024.*
	4.3B			Eighth Supplemental Indenture, dated as of June 27, 2014, among Omega Healthcare Investors, Inc., each of the subsidiary guarantors listed therein and U.S. Bank National Association, as trustee, relating to the 5.875% Senior Notes due 2024.*
	4.4			First Supplemental Indenture, dated as of June 27, 2014, among Omega Healthcare Investors, Inc., each of the subsidiary guarantors listed therein and U.S. Bank National Association, as trustee, relating to the 4.95% Senior Notes due 2024.*
	10.1			Credit Agreement, dated as of June 27, 2014, among Omega Healthcare Investors, Inc., certain subsidiaries of Omega Healthcare Investors, Inc. identified therein as guarantors, the lenders named therein and Bank of America, N.A. as Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 2, 2014).
	31.1			Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.*
	31.2			Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.*
	32.1			Section 1350 Certification of the Chief Executive Officer.*
	32.2			Section 1350 Certification of the Chief Financial Officer.*
	101.INS			XBRL Instance Document.
	101.SCH			XBRL Taxonomy Extension Schema Document.
	101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.
	101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.
	101.LAB			XBRL Taxonomy Extension Label Linkbase Document.
	101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.

* Exhibits that are filed herewith.

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 6 , 2014	By:	/S/ C. TAYLOR PICKETT
		C. Taylor Pickett
		Chief Executive Officer

Date: August 6 , 2014	By:	/S/ ROBERT O. STEPHENSON
		Robert O. Stephenson
		Chief Financial Officer

(Exact name of Registrant as specified in its charter)

Maryland		38-3041398
(State of incorporation)		(IRS Employer Identification No.)

200 International Circle, Suite 3500, Hunt Valley, MD 21030
(Address of principal executive offices)

(410) 427-1700
(Telephone number, including area code)


Common Stock, $.10 par value	127,238,627
(Class)	(Number of shares)

TABLE OF CONTENTS
		Page No.
PART I	Financial Information

Item 1.	Financial Statements:
	Consolidated Balance Sheets June 30, 2014 (unaudited) and December 31, 2013	2

	Consolidated Statements of Operations (unaudited) Three and six months ended June 30, 2014 and 2013	3

	Consolidated Statement of Stockholders’ Equity Six months ended June 30, 2014 (unaudited)	4

	Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 2014 and 2013	5

	Notes to Consolidated Financial Statements June 30, 2014 (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

PART II	Other Information

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 6.	Exhibits	42

	June 30,			December 31,
	2014			2013
	(Unaudited)
ASSETS
Real estate properties
Land and buildings	$	3,124,909		$	3,099,547
Less accumulated depreciation		(768,276	)		(707,410	)
Real estate properties – net		2,356,633			2,392,137
Investment in direct financing leases		534,209			529,445
Mortgage notes receivable – net		652,336			241,515
		3,543,178			3,163,097
Other investments – net		56,112			53,054
		3,599,290			3,216,151
Assets held for sale – net		820			1,356
Total investments		3,600,110			3,217,507

Cash and cash equivalents		28,689			2,616
Restricted cash		34,781			31,759
Accounts receivable – net		153,745			147,504
Other assets		72,034			62,830
Total assets	$	3,889,359		$	3,462,216

LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving line of credit	$	270,000		$	326,000
Term loan		200,000			200,000
Secured borrowings		295,490			298,531
Unsecured borrowings – net		1,594,123			1,199,887
Accrued expenses and other liabilities		145,951			137,695
Total liabilities		2,505,564			2,162,113

Stockholders’ equity:
Common stock $.10 par value authorized – 200,000 shares issued and outstanding – 126,713 shares as of June 30, 2014 and 123,530 as of December 31, 2013		12,671			12,353
Common stock – additional paid-in capital		2,104,430			1,998,169
Cumulative net earnings		1,029,295			926,649
Cumulative dividends paid		(1,762,601	)		(1,637,068	)
Total stockholders’ equity		1,383,795			1,300,103
Total liabilities and stockholders’ equity	$	3,889,359		$	3,462,216

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Revenue
Rental income	$	96,242		$	93,069		$	192,160		$	186,178
Income from direct financing leases		14,146			-			28,230			-
Mortgage interest income		9,923			7,435			19,249			14,781
Other investment income – net		1,489			2,011			3,162			3,317
Total operating revenues		121,800			102,515			242,801			204,276

Expenses
Depreciation and amortization		31,301			32,225			62,745			64,184
General and administrative		6,297			5,483			12,794			10,680
Acquisition costs		45			9			140			143
Impairment loss on real estate properties		1,558			-			1,558			-
Provisions for uncollectible mortgages, notes and accounts receivable		2,761			65			2,745			65
Total operating expenses		41,962			37,782			79,982			75,072

Income before other income and expense		79,838			64,733			162,819			129,204
Other income (expense)
Interest income		17			14			25			17
Interest expense		(29,447	)		(24,952	)		(56,528	)		(50,624	)
Interest – amortization of deferred financing costs		(946	)		(698	)		(1,868	)		(1,380	)
Interest – refinancing (costs) gain		(2,645	)		11,112			(4,685	)		11,112
Total other expense		(33,021	)		(14,524	)		(63,056	)		(40,875	)

Income before gain (loss) on assets sold		46,817			50,209			99,763			88,329
(Loss) gain on assets sold – net		-			(1,151	)		2,883			(1,151	)
Net income available to common stockholders	$	46,817		$	49,058		$	102,646		$	87,178

Income per common share available to common shareholders:
Basic:
Net income	$	0.37		$	0.42		$	0.82		$	0.76
Diluted:
Net income	$	0.37		$	0.42		$	0.81		$	0.76

Dividends declared and paid per common share	$	0.50		$	0.46		$	0.99		$	0.91

Weighted-average shares outstanding, basic		126,474			116,199			125,467			114,491
Weighted-average shares outstanding, diluted		127,436			117,022			126,130			115,273

	Common Stock Par Value		Additional Paid-in Capital			Cumulative Net Earnings		Cumulative Dividends			Total

Balance at December 31, 2013 (123,530 common shares)	$	12,353	$	1,998,169		$	926,649	$	(1,637,068	)	$	1,300,103
Grant of restricted stock to company directors (12 shares at $35.79 per share)		1		(1	)		—		—			—
Amortization of restricted stock		—		4,466			—		—			4,466
Vesting of restricted stock to company executives, net of tax withholdings (53 shares)		5		(948	)		—		—			(943	)
Dividend reinvestment plan (1,399 shares at $32.76 per share)		140		45,664			—		—			45,804
Grant of stock as payment of directors fees (3 shares at an average of $33.58 per share)		—		100			—		—			100
Equity Shelf Program (1,716 shares at $34.06 per share, net of issuance costs)		172		56,980			—		—			57,152
Net income		—		—			102,646		—			102,646
Common dividends ($0.99 per share)		—		—			—		(125,533	)		(125,533	)
Balance at June 30, 2014 (126,713 common shares)	$	12,671	$	2,104,430		$	1,029,295	$	(1,762,601	)	$	1,383,795


	Six months Ended June 30,
	2014			2013
Cash flows from operating activities
Net income	$	102,646		$	87,178
Adjustment to reconcile net income to cash provided by operating activities:
Depreciation and amortization		62,745			64,184
Provision for impairment on real estate properties		1,558			—
Provision for uncollectible mortgages, notes and accounts receivable		2,745			65
Amortization of deferred financing and debt extinguishment costs/(gain)		6,553			(9,732	)
Accretion of direct financing leases		(4,764	)		—
Restricted stock amortization expense		4,548			2,924
(Gain)/loss on assets sold – net		(2,883	)		1,151
Amortization of acquired in-place leases - net		(2,571	)		(2,503	)
Change in operating assets and liabilities – net of amounts assumed/acquired:
Accounts receivable, net		912			147
Straight-line rent receivables		(10,701	)		(13,702	)
Lease inducements		1,362			1,685
Effective yield receivable on mortgage notes		(584	)		(1,074	)
Other operating assets and liabilities		5,189			(8,995	)
Net cash provided by operating activities		166,755			121,328
Cash flows from investing activities
Acquisition of real estate – net of liabilities assumed and escrows acquired		(22,000	)		—
Placement of mortgage loans		(528,343	)		(2,869	)
Proceeds from sale of real estate investments		3,924			2,288
Capital improvements to real estate investments		(8,362	)		(17,307	)
Proceeds from other investments		2,345			2,942
Investments in other investments		(5,379	)		(30,248	)
Collection of mortgage principal		117,522			237
Net cash used in investing activities		(440,293	)		(44,957	)
Cash flows from financing activities
Proceeds from credit facility borrowings		590,000			201,000
Payments on credit facility borrowings		(646,000	)		(254,000	)
Receipts of other long-term borrowings		594,320			59,355
Payments of other long-term borrowings		(202,490	)		(112,208	)
Payments of financing related costs		(12,740	)		(1,032	)
Receipts from dividend reinvestment plan		45,804			41,588
Payments for exercised options and restricted stock – net		(943	)		—
Net proceeds from issuance of common stock		57,152			98,264
Dividends paid		(125,492	)		(104,010	)
Net cash provided by (used in) financing activities		299,611			(71,043	)

Increase in cash and cash equivalents		26,073			5,328
Cash and cash equivalents at beginning of period		2,616			1,711
Cash and cash equivalents at end of period	$	28,689		$	7,039
Interest paid during the period, net of amounts capitalized	$	50,378		$	51,397


	June 30, 2014			December 31, 2013
	(in thousands)

Contractual receivables	$	1,984		$	2,941
Effective yield interest receivables		3,938			5,333
Straight-line receivables		133,397			123,486
Lease inducements		14,866			16,228
Allowance		(440	)		(484	)
Accounts receivable – net	$	153,745		$	147,504


	Pro Forma
	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in thousands, except per share amounts, unaudited)

Revenues	$	122,272	$	103,892	$	243,832	$	207,030
Net income available to common stockholders	$	46,952	$	49,566	$	102,977	$	88,194

Earnings per share – diluted:
Net income available to common stockholders – as reported	$	0.37	$	0.42	$	0.81	$	0.76
Net income available to common stockholders – pro forma	$	0.37	$	0.42	$	0.82	$	0.77

Year 1	Year 2	Year 3	Year 4	Year 5
$47,000	$47,000	$47,224	$48,074	$49,276

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in thousands)

Stock-based compensation expense	$	2,285	$	1,472	$	4,548	$	2,924


	Grant Year	Shares/ Units		Grant Date Average Fair Value Per Unit/ Share		Total Compensation Cost (in millions)		Weighted Average Period of Expense Recognition (in months)		Unrecognized Compensation Cost (in millions)

Multi-year TSR PRSUs	2011		279,550	$	11.06	$	3.1		44	$	-
Multi-year Relative TSR PRSUs	2011		93,183		12.26		1.1		44		-
Restricted stock units	2013		213,741		29.80		6.4		36		5.3
2014 Transition TSR PRSUs	2013		77,371		8.27		0.6		12		0.3
2015 Transition TSR PRSUs	2013		77,369		7.48		0.6		24		0.4
2016 Transition TSR PRSUs	2013		115,785		8.67		1.0		36		0.8
2014 Transition Relative TSR PRSUs	2013		77,371		11.68		0.9		12		0.5
2015 Transition Relative TSR PRSUs	2013		77,368		13.06		1.0		24		0.8
2016 Transition Relative TSR PRSUs	2013		115,781		14.25		1.7		36		1.4
Restricted stock units	2014		122,137		29.80		3.6		36		3.0
2016 TSR PRSUs	2014		154,584		8.67		1.4		48		1.2
2016 Relative TSR PRSUs	2014		154,584		14.25		2.2		48		1.9
Total			1,558,824	$	15.12	$	23.6			$	15.6


			Current			June 30,			December 31,
	Maturity		Rate			2014			2013
						(in thousands)
Secured borrowings:
HUD mortgages assumed June 2010 (1)		2040 - 2045		4.85	%	$	127,490		$	128,641
HUD mortgages assumed October 2011 (1)		2036 - 2040		4.87	%		30,712			31,145
HUD mortgages assumed December 2011 (1)		2044		3.06	%		58,008			58,592
HUD mortgages assumed December 2012 (1)		2031 - 2045		5.50	%		79,280			80,153
Total secured borrowings							295,490			298,531

Unsecured borrowings:
Revolving line of credit		2018		1.65	%	$	270,000		$	326,000
Term loan		2019		1.65	%		200,000			200,000
							470,000			526,000

2020 notes		2020		7.50	%		200,000			200,000
2022 notes		2022		6.75	%		575,000			575,000
2024 notes		2024		5.875	%		400,000			400,000
2024 notes		2024		4.95	%		400,000			—
Subordinated debt		2021		9.00	%		20,818			20,892
							1,595,818			1,195,892
(Discount) premium - net							(1,695	)		3,995
Total unsecured borrowings							2,064,123			1,725,887
Totals – net						$	2,359,613		$	2,024,418


	June 30, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:	(in thousands)
Cash and cash equivalents	$	28,689	$	28,689	$	2,616	$	2,616
Restricted cash		34,781		34,781		31,759		31,759
Investment in direct financing leases		534,209		534,209		529,445		529,445
Mortgage notes receivable – net		652,336		685,768		241,515		240,482
Other investments – net		56,112		58,359		53,054		50,124
Totals	$	1,306,127	$	1,341,806	$	858,389	$	854,426
Liabilities:
Revolving line of credit	$	270,000	$	270,000	$	326,000	$	326,000
Term loan		200,000		200,000		200,000		200,000
7.50% notes due 2020 – net		198,063		269,194		197,890		256,852
6.75% notes due 2022 – net		580,757		771,716		581,105		735,687
5.875% notes due 2024 – net		400,000		449,489		400,000		411,266
4.95% notes due 2024 – net		394,485		406,941		—		—
HUD debt		295,490		315,812		298,531		287,718
Subordinated debt		20,818		29,790		20,892		28,849
Totals	$	2,359,613	$	2,712,942	$	2,024,418	$	2,246,372

	June 30, 2014
	Issuer & Subsidiary Guarantors			Non-Guarantor Subsidiaries			Elimination Company			Consolidated

ASSETS
Real estate properties
Land and buildings	$	2,666,999		$	457,910		$	-		$	3,124,909
Less accumulated depreciation		(704,409	)		(63,867	)		-			(768,276	)
Real estate properties – net		1,962,590			394,043			-			2,356,633
Investment in direct financing leases		534,209			-			-			534,209
Mortgage notes receivable – net		652,336			-			-			652,336
		3,149,135			394,043			-			3,543,178
Other investments – net		56,112			-			-			56,112
		3,205,247			394,043			-			3,599,290
Assets held for sale – net		820			-			-			820
Total investments		3,206,067			394,043			-			3,600,110

Cash and cash equivalents		28,689			-			-			28,689
Restricted cash		7,003			27,778			-			34,781
Accounts receivable – net		145,315			8,430			-			153,745
Investment in affiliates		107,426			-			(107,426	)		-
Other assets		43,884			28,150			-			72,034
Total assets	$	3,538,384		$	458,401		$	(107,426	)	$	3,889,359

LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving line of credit	$	270,000		$	-		$	-		$	270,000
Term loan		200,000			-			-			200,000
Secured borrowings		-			295,490			-			295,490
Unsecured borrowings – net		1,573,305			20,818			-			1,594,123
Accrued expenses and other liabilities		111,284			34,667			-			145,951
Intercompany payable		-			74,665			(74,665	)		-
Total liabilities		2,154,589			425,640			(74,665	)		2,505,564

Stockholders’ equity:
Common stock		12,671			-			-			12,671
Common stock – additional paid-in capital		2,104,430			-			-			2,104,430
Cumulative net earnings		1,029,295			32,761			(32,761	)		1,029,295
Cumulative dividends paid		(1,762,601	)		-			-			(1,762,601	)
Total stockholders’ equity		1,383,795			32,761			(32,761	)		1,383,795
Total liabilities and stockholders’ equity	$	3,538,384		$	458,401			(107,426	)	$	3,889,359

	December 31, 2013
	Issuer & Subsidiary Guarantors			Non – Guarantor Subsidiaries			Elimination Company			Consolidated

ASSETS
Real estate properties
Land and buildings	$	2,642,047		$	457,500		$	—		$	3,099,547
Less accumulated depreciation		(653,858	)		(53,552	)		—			(707,410	)
Real estate properties – net		1,988,189			403,948			—			2,392,137
Investment in direct financing leases		529,445			—			—			529,445
Mortgage notes receivable – net		241,515			—			—			241,515
		2,759,149			403,948			—			3,163,097
Other investments – net		53,054			—			—			53,054
		2,812,203			403,948			—			3,216,151
Assets held for sale – net		1,356			—			—			1,356
Total investments		2,813,559			403,948			—			3,217,507

Cash and cash equivalents		2,616			—			—			2,616
Restricted cash		6,827			24,932			—			31,759
Accounts receivable – net		140,331			7,173			—			147,504
Investment in affiliates		108,707			—			(108,707	)		—
Other assets		36,723			26,107			—			62,830
Total assets	$	3,108,763		$	462,160		$	(108,707	)	$	3,462,216

LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving line of credit	$	326,000		$	—		$	—		$	326,000
Term loan		200,000			—			—			200,000
Secured borrowings		—			298,531			—			298,531
Unsecured borrowings – net		1,178,995			20,892			—			1,199,887
Accrued expenses and other liabilities		103,665			34,030			—			137,695
Intercompany payable		—			83,065			(83,065	)		—
Total liabilities		1,808,660			436,518			(83,065	)		2,162,113

Stockholders’ equity:
Common stock		12,353			—			—			12,353
Common stock – additional paid-in-capital		1,998,169			—			—			1,998,169
Cumulative net earnings		926,649			25,642			(25,642	)		926,649
Cumulative dividends paid		(1,637,068	)		—			—			(1,637,068	)
Total stockholders’ equity		1,300,103			25,642			(25,642	)		1,300,103
Total liabilities and stockholders’ equity	$	3,108,763		$	462,160		$	(108,707	)	$	3,462,216

	Three Months Ended June 30, 2014												Six Months Ended June 30, 2014
	Issuer & Subsidiary Guarantors			Non – Guarantor Subsidiaries			Elimination			Consolidated			Issuer & Subsidiary Guarantors			Non – Guarantor Subsidiaries			Elimination			Consolidated
Revenue
Rental income	$	83,690		$	12,552		$	-		$	96,242		$	167,056		$	25,104		$	-		$	192,160
Income from direct financing leases		14,146			-			-			14,146			28,230			-			-			28,230
Mortgage interest income		9,923			-			-			9,923			19,249			-			-			19,249
Other investment income – net		1,489			-			-			1,489			3,162			-			-			3,162
Total operating revenues		109,248			12,552			-			121,800			217,697			25,104			-			242,801

Expenses
Depreciation and amortization		26,148			5,153			-			31,301			52,430			10,315			-			62,745
General and administrative		6,198			99			-			6,297			12,604			190			-			12,794
Acquisition costs		45			-			-			45			140			-			-			140
Provision for impairment on real estate properties		1,558			-			-			1,558			1,558			-			-			1,558
Provision for uncollectible mortgages, notes and accounts receivable		2,761			-			-			2,761			2,745			-			-			2,745
Total operating expenses		36,710			5,252			-			41,962			69,477			10,505			-			79,982

Income before other income and expense		72,538			7,300			-			79,838			148,220			14,599			-			162,819
Other income (expense):
Interest income		9			8			-			17			10			15			-			25
Interest expense		(25,716	)		(3,731	)		-			(29,447	)		(49,044	)		(7,484	)		-			(56,528	)
Interest – amortization of deferred financing costs		(940	)		(6	)		-			(946	)		(1,857	)		(11	)		-			(1,868	)
Interest – refinancing costs		(2,645	)		-			-			(2,645	)		(4,685	)		-			-			(4,685	)
Equity in earnings		3,571			-			(3,571	)		-			7,119			-			(7,119	)		-
Total other expense		(25,721	)		(3,729	)		(3,571	)		(33,021	)		(48,457	)		(7,480	)		(7,119	)		(63,056	)

Income before gain on assets sold		46,817			3,571			(3,571	)		46,817			99,763			7,119			(7,119	)		99,763
Gain on assets sold – net		-			-			-			-			2,883			-			-			2,883
Net income available to common stockholders	$	46,817		$	3,571		$	(3,571	)	$	46,817		$	102,646		$	7,119		$	(7,119	)	$	102,646

	Three Months Ended June 30, 2013												Six Months Ended June 30, 2013
	Issuer & Subsidiary Guarantors			Non – Guarantor Subsidiaries			Elimination			Consolidated			Issuer & Subsidiary Guarantors			Non – Guarantor Subsidiaries			Elimination			Consolidated
Revenue
Rental income	$	80,462		$	12,607		$	-		$	93,069		$	160,964		$	25,214		$	-		$	186,178
Mortgage interest income		7,435			-			-			7,435			14,781			-			-			14,781
Other investment income – net		2,011			-			-			2,011			3,317			-			-			3,317
Total operating revenues		89,908			12,607			-			102,515			179,062			25,214			-			204,276

Expenses
Depreciation and amortization		27,055			5,170			-			32,225			53,851			10,333			-			64,184
General and administrative		5,380			103			-			5,483			10,487			193			-			10,680
Acquisition costs		9			-			-			9			143			-			-			143
Provision for uncollectible mortgages, notes and accounts receivable		65			-			-			65			65			-			-			65
Total operating expenses		32,509			5,273			-			37,782			64,546			10,526			-			75,072

Income before other income and expense		57,399			7,334			-			64,733			114,516			14,688			-			129,204
Other income (expense):
Interest income		7			7			-			14			3			14			-			17
Interest expense		(21,214	)		(3,738	)		-			(24,952	)		(42,704	)		(7,920	)		-			(50,624	)
Interest – amortization of deferred financing costs		(693	)		(5 )			-			(698	)		(1,375	)		( 5)			-			(1,380	)
Interest – refinancing gain		11,112			-			-			11,112			11,112			-			-			11,112
Equity in earnings		3,598			-			(3,598	)		-			6,777			-			(6,777	)		-
Total other expense		(7,190	)		(3,736	)		(3,598	)		(14,524	)		(26,187	)		(7,911	)		(6,777	)		(40,875	)

Income before gain (loss) on assets sold		50,209			3,598			(3,598	)		50,209			88,329			6,777			(6,777	)		88,329
Loss on assets sold – net		(1,151	)		-			-			(1,151	)		(1,151	)		-			-			(1,151	)
Net income available to common stockholders	$	49,058		$	3,598		$	(3,598	)	$	49,058		$	87,178		$	6,777		$	(6,777	)	$	87,178

	OMEGA HEALTHCARE INVESTORS, INC.

	By:	/s/ Robert O. Stephenson
	Name: Robert O. Stephenson
	Title: Chief Financial Officer and Treasurer

	On behalf of each Subsidiary Guarantor, its sole member, general partner or trustee, named on the attached Schedule I


	By:	/s/ Daniel J. Booth
	Name: Daniel J. Booth
	Title: Chief Operating Officer and Secretary

	On behalf of each of the New Subsidiaries or its sole member, named on the attached Schedule II

	U.S. BANK NATIONAL ASSOCIATION, as Trustee

	By:	/s/ Dave Ferrell
	Name: Dave Ferrell
	Title: Vice President


Date: August 6, 2014		/S/ C. TAYLOR PICKETT
		C. Taylor Pickett
		Chief Executive Officer