10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-11316

OMEGA HEALTHCARE INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND 38-3041398
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)

905 W. EISENHOWER CIRCLE, SUITE 110 48103
ANN ARBOR, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 313-747-9790

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NAME OF EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
8.5% CONVERTIBLE DEBENTURES, DUE 2001 NEW YORK STOCK EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

NONE

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES WAS $581,000,000 BASED ON THE $31.375 CLOSING PRICE PER SHARE FOR
SUCH STOCK ON THE NEW YORK STOCK EXCHANGE ON FEBRUARY 28, 1997.

AS OF FEBRUARY 28, 1997, THERE WERE 18,784,560 SHARES OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1996, ARE INCORPORATED BY REFERENCE IN PART II OF THIS FORM
10-K.

THE REGISTRANT'S DEFINITIVE PROXY STATEMENT, WHICH WAS FILED WITH THE
COMMISSION ON MARCH 6, 1997, IS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K.
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PART I

ITEM 1 -- BUSINESS OF THE COMPANY

Omega Healthcare Investors, Inc. (the "Company") was incorporated in the
state of Maryland on March 31, 1992. It is a self-administered real estate
investment trust ("REIT") which invests in income-producing healthcare
facilities, principally long-term care facilities located in the United States.
The Company anticipates providing lease or mortgage financing for healthcare
facilities to qualified operators and acquiring additional healthcare facility
types, including assisted living and acute care facilities. Financing for such
future investments may be provided by borrowings under the Company's bank line
of credit, private placements or public offerings of debt or equity, the
assumption of secured indebtedness, or a combination of these methods. The
Company also may finance acquisitions through the exchange of properties or the
issuance of shares of its capital stock, if such transactions otherwise satisfy
the Company's investment criteria.

Effective September 30, 1994, the Company acquired all the outstanding
common stock of Health Equity Properties Incorporated ("HEP"), a healthcare real
estate investment trust. The total purchase consideration for HEP approximated
$180 million, comprising common stock of $143 million represented by 5,826,000
shares, long-term debt assumed of $26 million, and other obligations,
professional fees and costs incurred in the transaction.

During 1995, the Company became a primary sponsor of Principal Healthcare
Finance Limited ("Principal"), an Isle of Jersey (United Kingdom) company
established to provide capital and medium-term financing on a stable, continuing
basis to the private-sector healthcare industry in the United Kingdom. The
nursing home industry in the United Kingdom, like that in the United States, is
consolidating and capital demand exists. At December 31, Principal owned 42
properties for which it has invested L69.7 million (approximately $116 million).
The Company also provides services for the administration, marketing,
identification and evaluation of potential investments and the monitoring of the
performance of the healthcare operators financed by Principal.

As of December 31, 1996, the Company's portfolio of domestic investments
consisted of 214 long-term care facilities and 3 medical office buildings. The
Company owns and leases 132 long-term facilities and 3 medical office buildings,
and provides mortgages, including participating and convertible participating
mortgages on 82 long-term healthcare facilities. The facilities are located in
24 states and operated by 34 unaffiliated operators. The Company's gross
investments at December 31, 1996 totaled $643,261,000. During 1996, new
investments approximated $96 million as a result of entering into sale/leaseback
transactions and making mortgage loans and other investments.

At March 1, 1997, the Company employed 21 full-time employees. The
executive offices of the Company are located at 905 West Eisenhower Circle,
Suite 110, Ann Arbor, Michigan, 48103. Its telephone number is (313) 747-9790.

INVESTMENT OBJECTIVES

The investment objectives of the Company are to pay regular cash dividends
to shareholders; to provide the opportunity for increased dividends from annual
increases in rental and interest income from revenue participations and from
portfolio growth; to preserve and protect shareholders' capital; and to provide
the opportunity to realize capital growth.

INVESTMENT STRATEGIES AND POLICIES

The Company maintains a diversified portfolio of income-producing
healthcare facilities or mortgages thereon, with a primary focus on long-term
care facilities located in the United States. In evaluating potential
investments, the Company considers such factors as: (i) the quality and
experience of management and the credit worthiness of the operator of the
facility; (ii) the facility's historical, current and forecasted cash flow and
its adequacy to meet operational needs, capital expenditures and lease or debt
service obligations, while providing a competitive return on investment to the
Company; (iii) the construction quality, condition and

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design of the facility; (iv) the geographic area and type of facility; (v) the
tax, growth, regulatory and reimbursement environment of the community in which
the facility is located; (vi) the occupancy and demand for similar healthcare
facilities in the same or nearby communities; and (vii) the payor mix of
private, Medicare and Medicaid patients.

In making investments, the Company generally seeks and intends to focus on
established, creditworthy, "middle-market" healthcare operators which meet the
Company's standards for quality and experience of management. Although the
Company has emphasized long-term care investments, it will diversify prudently
into other types of healthcare facilities or other properties. The Company
actively seeks to diversify its investments in terms of geographic locations,
operators and facility types.

A fundamental strategy of the Company is to obtain contractual rent
escalations under long-term, non-cancelable, "triple-net" leases and revenue
participation through participating mortgage loans, and to obtain substantial
liquidity deposits. Additional security is typically provided by covenants
regarding minimum working capital and net worth, liens on accounts receivable
and other operating assets, and various provisions for cross-default,
cross-collateralization and corporate/personal guarantees, when appropriate.

The Company prefers to invest in equity ownership of properties. Due to
regulatory, tax or other considerations, the Company sometimes pursues
alternative investment structures, including convertible participating and
participating mortgages, that achieve returns comparable to equity investments.
The following summarizes the four primary structures currently used by the
Company:

Purchase/Leaseback. The Company's owned properties are generally
leased under provisions of leases for terms ranging from 5 to 17 years,
plus renewal options. The leases originated by the Company generally
provide for minimum annual rentals which are subject to annual formula
increases (i.e., based upon such factors as increases in the Consumer Price
Index ("CPI") or increases in the revenues of the underlying properties),
with certain fixed minimum and maximum levels. Generally, the operator
holds an option to repurchase at set dates at formula prices. The average
annualized yield from leases was 11.85% at January 1, 1997.

Convertible Participating Mortgage. Convertible Participating
Mortgages are secured by first mortgage liens on the underlying real estate
and personal property of the mortgagor. Interest rates are usually subject
to annual increases based upon increases in the CPI or increases in
revenues of the underlying long-term care facilities, with certain maximum
limits. Convertible Participating Mortgages afford the Company an option to
convert its mortgage into direct ownership of the property, generally at a
point six to nine years from inception; they are then subject to a
leaseback to the operator for the balance of the original agreed term and
for the original agreed participations in revenues or CPI adjustments. This
allows the Company to capture a portion of the potential appreciation in
value of the real estate. The operator has the right to buy out the
Company's option at formula prices. The average annualized yield on these
mortgages was approximately 12.67% at January 1, 1997.

Participating Mortgage. Participating Mortgages of the Company are
secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor. Interest rates are usually subject to annual
increases based upon increases in the CPI or increases in revenues of the
underlying long-term care facilities, with certain maximum limits. The
average annualized yield on these investments was approximately 13.33% at
January 1, 1997.

Fixed-Rate Mortgage. These Mortgages of the Company, with a fixed
interest rate for the mortgage term, are also secured by first mortgage
liens on the underlying real estate and personal property of the mortgagor.
The average annualized yield on these investments was 11.27% at January 1,
1997.

The table set forth in Item 2 -- Properties, herein, contains information
regarding the Company's real estate properties, their locations, and the types
of investment structures as of December 31, 1996.

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BORROWING POLICIES

The Company may incur additional long-term indebtedness, and anticipates
attaining and then maintaining a long-term debt-to-capitalization ratio of
approximately 40%. The Company intends to review periodically its policy with
respect to its debt-to-equity ratio and to adapt such policy as its management
deems prudent in light of prevailing market conditions. The Company's strategy
generally has been to match the maturity of its indebtedness with the maturity
of its assets, and to employ long-term, fixed-rate debt to the extent
practicable.

The Company will use the proceeds of any additional indebtedness to provide
permanent financing for investments in additional healthcare facilities. The
Company may obtain either secured or unsecured indebtedness, which may be
convertible into capital stock or accompanied by warrants to purchase capital
stock. Where debt financing is present on terms deemed favorable, the Company
generally may invest in properties subject to existing loans, secured by
mortgages, deeds of trust or similar liens on properties.

The Company has an unsecured acquisition line of credit which permits
borrowings of up to $150,000,000 of which $86 million is available at February
28, 1997. This credit facility provides temporary funds for new investments in
healthcare facilities. The Company expects periodically to replace funds drawn
on the acquisition line through long-term, fixed-rate borrowings, the issuance
of equity linked borrowings, or the issuance of additional shares of capital
stock.

COMPETITION

The Company competes for additional healthcare facility investments with
other healthcare investors, including other real estate investment trusts. The
operators of the facilities compete with other regional or local nursing care
facilities for the support of the medical community, including physicians and
acute care hospitals, as well as the general public. Some significant
competitive factors for the placing of patients in skilled and intermediate care
nursing facilities include quality of care, reputation, physical appearance of
the facilities, services offered, family preferences, physician services and
price.

GOVERNMENT HEALTHCARE REGULATION AND REIMBURSEMENTS

Healthcare is an area of extensive government regulation and dynamic
regulatory change. The Company's lessees and mortgagors are and will continue to
be subject to extensive federal, state and local regulation, including facility
inspections, reimbursement policies, and control over certain expenditures.
Changes in laws or regulations, or new interpretations of existing laws or
regulations, can have a dramatic effect on methods of doing business, costs of
doing business and amounts of reimbursement by government and private
third-party payors.

A significant portion of the revenues of the Company's lessees and
mortgagors are and will be dependent upon reimbursement from third-party payors,
including the Medicaid and Medicare programs, post-retirement benefit plans,
private insurance companies and health maintenance organizations. Operators also
are subject to extensive federal, state and local regulations relating to their
operations, and the Company's facilities are subject to periodic inspection by
government and other authorities to assure continual compliance with mandated
procedures, licensure requirements under state law and certification standards
under the Medicare and Medicaid programs.

The levels of revenues and profitability of the Company's lessees and
mortgagors will continue to be affected by the ongoing efforts of third-party
payors to contain or reduce the costs of healthcare. In addition, in an attempt
to reduce the United States' federal budget deficit, there have been, and the
Company expects that there will continue to be, proposals to limit Medicaid and
Medicare reimbursement for healthcare services. Proposals have also been made to
limit Medicaid reimbursement for healthcare services in many of the states in
which the Company's facilities are located. The Company cannot at this time
predict whether any of these proposals will be adopted at the federal or state
level or, if adopted and implemented, what effect, if any, such proposals will
have on the lessees or mortgagors of the Company, and, indirectly, the Company.
A significant change in coverage, reduction in payment rates by third-party
payors, or the decline in availability of funding

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could have a material adverse effect on the business and financial condition of
the Company's lessees and mortgagors, and, indirectly, the Company's financial
condition.

There can be no assurance that the Medicaid reimbursement programs in each
of the states where the lessees' and mortgagors' facilities are located will
reimburse rent or interest costs of the lessees and mortgagors at increased
levels recognizing the initial sales to or borrowings from the Company. Failure
by these state Medicaid programs to provide reimbursement at current or
increased levels could have an adverse effect upon the cash flow of the
facilities and, hence, on the ability of the Company's lessees and mortgagors to
meet their respective payment obligations to the Company.

Other changes in the healthcare industry include continuing trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third party oversight of healthcare company
operations and business practices, and increased demand for capitated healthcare
services (delivery of services at a fixed price per capita basis to a defined
group of covered parties). The entrance of insurance companies into managed care
programs is also accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of healthcare
services that are reimbursed under Medicare and Medicaid programs continues to
increase as the population ages and as states expand their Medicaid programs.
Continued eligibility to participate in these programs is crucial to a
provider's financial strength. As a result of the foregoing, the revenues and
margins of the operators of the Company's facilities may decrease, resulting in
a reduction of the Company's rent/interest coverage from investments.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

At all times, the Company intends to make and manage its investments
(including the sale or disposition of property or other investments) and to
operate in such a manner as to be consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") (or regulations
thereunder) to qualify as a REIT, unless, because of changes in circumstances or
changes in the Code (or regulations thereunder), the Board of Directors
determines that it is no longer in the best interests of the Company to qualify
as a REIT. As such, it generally will not pay federal income taxes on the
portion of its income which is distributed to shareholders.

EXECUTIVE OFFICERS OF THE COMPANY

At the date of this report, the executive officers of the Company are:

Essel W. Bailey, Jr. (52) has been President, Chief Executive Officer
and Secretary of the Company since March 1992, and was a Managing Director
of Omega Capital from 1986 to 1992. He was previously a partner in a major
Michigan law firm. Mr. Bailey is also a director of Principal Healthcare
Finance Limited and of Excellence Manufacturing, Inc., a supplier to the
auto industry.

David A. Stover (51) joined the Company as Vice President and Chief
Financial Officer in September 1994. Mr. Stover is a Certified Public
Accountant and has 23 years' experience with the international accounting
firm of Ernst & Young LLP and its predecessor firms. From 1981 through
1990, he was an audit, tax and consulting partner, spending the last of
those years as area partner-in-charge of services for the firm's healthcare
clients in Western Michigan. From 1992 to 1994, Mr. Stover was principal of
his own consulting firm and, from 1990 to 1992, he was Chief Financial
Officer of International Research and Development Corporation.

F. Scott Kellman (40) joined the Company as Senior Vice
President-Acquisitions in August 1993, and was appointed Executive Vice
President in August 1994. From 1986 to 1989, he was Vice President of
Meritor Savings Bank, the last two years as director of the healthcare
lending unit. From 1989 to 1991, he served as Vice President of Van Kampen
Merritt, Inc., an investment banking subsidiary of Xerox. From September
1991 to December 1992, he was employed by Philadelphia First Group
(Investment Bank), and from January 1993 through August of 1993 he was the
Chief Operating Officer of Medical REIT.

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James P. Flaherty (49) joined the Company in 1996 and was appointed
Vice President-International and Managing Director of Omega U.K. Limited in
January 1997. Before he joined the Company, he was Chairman of Black Rock
Capital Corporation, a leasing and merchant banking firm he founded in
1994. From April 1991 until December of 1993 Mr. Flaherty was Managing
Partner of Pareto Partners, a London based investment management firm.
Prior to 1991, he was employed by American Express Bank Ltd. in a number of
senior management capacities and by State National Bank of Connecticut and
its successor, The Connecticut Bank & Trust Co..

OTHER KEY PERSONNEL

Todd Robinson (31), Assistant Vice President; Director of Acquisitions, is
a Certified Public Accountant who joined Omega in June 1995, after five years
with the real estate group at Interstate/Johnson Lane, where he was responsible
for the healthcare portfolio. Prior to Interstate, Mr. Robinson was a tax
consultant with Arthur Andersen & Company, LLP.

Joseph Emanuele (62) joined the Company in 1996 as Director of Management
Operations. His responsibilities encompass internal operations, customer
relations, evaluation, assessment and monitoring client operations. Mr. Emanuele
has over 25 years in the nursing home industry, holding positions of
administrator and Vice President of Operations. For more than 5 years prior to
joining the Company, he was president of a management consulting firm
specializing in computerized systems for healthcare operations.

Carol Albaugh (34) joined the Company in December 1996 as Controller after
completing her MBA at the University of Michigan. Prior to joining the Company,
she held various progressively responsible positions at Borders Group
Incorporated, most recently serving as Manager of Financial Planning and
Analysis through March 1996.

ITEM 2 -- PROPERTIES

At December 31, 1996, the Company's real estate investments are in
long-term care facilities and medical office buildings. The investments are
either in the form of purchased facilities, which are leased to operators, or
mortgages on facilities which are operated by the mortgagors or their
affiliates. The facilities are located in 24 states and are operated by 34
unaffiliated operators. Basic information regarding investments as of December
31, 1996 is as follows: