OMEGA HEALTHCARE INVESTORS INC, 10-K405, 1997-03-31

OMEGA HEALTHCARE INVESTORS INC
10-K405, 1997-03-31
REAL ESTATE INVESTMENT TRUSTS

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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
------------------- -------------------
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.
================================================================================
<PAGE> 2

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:

<TABLE>
<CAPTION>
NO. OF NO. OF
INVESTMENT STRUCTURE/OPERATOR TOTAL BEDS FACILITIES OCCUPANCY %
----------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
PURCHASE/LEASEBACK PROPERTIES
Advocat, Inc................................................ 3,119 29 83
Unison Healthcare Corp...................................... 1,664 17 74
Emerald Healthcare Inc...................................... 1,336 31 73
ExtendaCare, Inc............................................ 880 22 72
Regency Health Services ,Inc................................ 872 6 96
Alden Management Services, Inc.............................. 870 4 91
Res-Care, Inc............................................... 596 8 N/A
Sun Healthcare Group, Inc................................... 517 4 87
First Health Care Associates................................ 360 1 69
Hunter Management Group, Inc................................ 300 1 90
Senior Care Properties, Inc................................. 280 1 76
Complete Care, Inc.......................................... 278 2 85
Meadowbrook Healthcare of N.C............................... 192 2 79
Kansas & Missouri, Inc...................................... 173 1 59
Integrated Health Services, Inc............................. 160 1 69
Liberty Assisted Living Centers, LP......................... 120 1 93
Tutera Evergreen, LLC....................................... 56 1 100
The Graduate Hospital....................................... 0 3 N/A
------ --- ---
11,773 135 81
</TABLE>

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<TABLE>
<CAPTION>
NO. OF NO. OF
INVESTMENT STRUCTURE/OPERATOR TOTAL BEDS FACILITIES OCCUPANCY %
----------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
CONVERTIBLE PARTICIPATING MORTGAGES
Regency Health Services, Inc................................ 546 4 95
Unison Healthcare Corp...................................... 347 3 73
Premiere HCP III Hillsborough, Inc.......................... 180 1 60
Senior Care Properties, Inc................................. 150 2 91
------ --- ---
1,223 10 84
PARTICIPATING MORTGAGES
GranCare, Inc............................................... 1,863 13 88
North Country Healthcare Associates......................... 652 12 87
ExtendaCare, Inc............................................ 203 3 46
Advocat, Inc................................................ 317 3 90
------ --- ---
3,035 31 86
FIXED-RATE MORTGAGES
Horizon/CMS Healthcare Corp................................. 1,179 11 N/A
American Healthcare Centers, Inc............................ 735 7 91
Advocat, Inc................................................ 423 4 92
Tiffany Care Centers........................................ 330 5 79
Emerald Healthcare, Inc..................................... 300 2 96
Integrated Health Services, Inc............................. 95 1 69
Senior Care Properties, Inc................................. 76 1 81
Quality Care, Inc........................................... 75 1 76
Other Mortgages............................................. 991 9 N/A
------ --- ---
4,204 41 89
------ --- ---
Totals................................................. 20,235 217 83
====== === ===
</TABLE>

- -------------------------
N/A -- Data are not reported or not applicable.

The distribution of real estate investments by investment type and state is
as follows:

<TABLE>
<CAPTION>
TOTAL
NUMBER OF TOTAL INVESTMENT INVESTMENT
INVESTMENT STRUCTURE/STATE FACILITIES BEDS ($1,000) YIELD
-------------------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C>
PURCHASE/LEASEBACK PROPERTIES
Indiana............................................... 68 3,327 $101,581 12.21%
Arkansas.............................................. 12 1,273 37,888 12.90
Texas................................................. 10 1,485 27,125 11.45
Kentucky.............................................. 10 1,103 35,141 11.03
Illinois.............................................. 7 1,074 37,661 11.13
No. Carolina.......................................... 6 805 27,419 10.16
Tennessee............................................. 5 606 17,447 11.22
Alabama............................................... 4 521 11,639 12.75
Pennsylvania.......................................... 3 0 30,031 13.54
Florida............................................... 2 420 14,146 12.10
West Virginia......................................... 2 182 5,573 11.85
Missouri.............................................. 1 360 9,000 12.28
Kansas................................................ 1 173 2,500 8.75
Washington............................................ 1 160 10,000 10.75
Ohio.................................................. 1 151 5,640 11.85
Iowa.................................................. 1 77 2,636 10.50
Colorado.............................................. 1 56 750 12.80
--- ------ -------- -----
Total Purchase/Leasebacks........................ 135 11,773 376,177 11.85
</TABLE>

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<TABLE>
<CAPTION>
TOTAL
NUMBER OF TOTAL INVESTMENT INVESTMENT
INVESTMENT STRUCTURE/STATE FACILITIES BEDS ($1,000) YIELD
-------------------------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C>
CONVERTIBLE PARTICIPATING MORTGAGES
Tennessee............................................. 4 546 18,232 13.65
Texas................................................. 3 347 10,200 11.87
Florida............................................... 3 330 10,941 11.79
--- ------ -------- -----
Total Convertible Participating.................. 10 1,223 39,373 12.67
PARTICIPATING MORTGAGES MICHIGAN
Michigan.............................................. 13 1,863 58,800 14.56
Maine................................................. 11 619 24,317 11.36
Florida............................................... 3 317 7,031 13.20
Kentucky.............................................. 3 203 4,423 11.63
Massachusetts......................................... 1 33 2,108 11.36
--- ------ -------- -----
Total Participating Mortgages.................... 31 3,035 96,679 13.33
FIXED RATE MORTGAGES
Texas................................................. 10 1,146 10,519 10.75
Ohio.................................................. 7 735 19,481 11.26
Florida............................................... 6 723 25,964 11.68
California............................................ 6 571 7,739 11.04
Missouri.............................................. 5 330 5,421 11.83
Iowa.................................................. 2 250 3,310 10.75
New Mexico............................................ 2 156 1,415 10.75
Tennessee............................................. 1 120 2,939 10.75
Utah.................................................. 1 100 1,671 10.75
Nevada................................................ 1 73 521 10.75
Other, primarily construction......................... 2,442 11.00
--- ------ -------- -----
Total Fixed Rate Mortgages....................... 41 4,204 81,422 11.27
--- ------ -------- -----
Total Real Estate Investments.................... 217 20,235 $593,651 12.07%
=== ====== ======== =====
</TABLE>

ITEM 3 -- LEGAL PROCEEDINGS

There were no legal proceedings pending as of December 31, 1996, or as of
the date of this report, to which the Company is a party or to which the
properties are subject, which were likely to have a material adverse effect on
the operations of the Company or on its financial condition.

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to shareholders during the fourth quarter of the
year covered by this report.

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PART II

ITEM 5 -- MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's shares of common stock are traded on the New York Stock
Exchange under the symbol OHI. The following table sets forth, for the periods
shown, the high and low prices as reported on the New York Stock Exchange
Composite and dividends per share:

<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------ --------------------------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW PER SHARE QUARTER HIGH LOW PER SHARE
- ------- ---- --- --------- ------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First $29.750 $26.375 $0.62 First $24.250 $23.500 $0.59
Second $29.125 $27.125 $0.62 Second $26.625 $23.625 $0.59
Third $30.125 $27.750 $0.62 Third $27.125 $25.375 $0.59
Fourth $33.500 $29.125 $0.62 Fourth $27.125 $23.500 $0.59
----- -----
$2.48 $2.36
</TABLE>

The closing price on February 28, 1997 was $31.375 per share. As of
February 28, 1997, there were 18,784,560 shares of common stock outstanding with
approximately 3,200 registered holders and approximately 30,000 beneficial
owners.

ITEM 6 -- SELECTED FINANCIAL DATA

The following selected financial data with respect to the Company should be
read in conjunction with the Company's Consolidated Financial Statements which
are incorporated herein by reference to the Company's 1996 Annual Report to
Shareholders, which is included herein as Exhibit 13.

<TABLE>
<CAPTION>
PERIOD FROM
DATE OF
INCORPORATION
TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------------- -------------
1996 1995 1994(2) 1993 1992(1)
---- ---- ------- ---- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues.................................... $73,127 $61,430 $37,747 $20,750 $5,968
Net Earnings before Extraordinary Charge
from Prepayment of Debt................ 34,590 29,490 17,777 11,573 4,424
Net Earnings................................ 34,590 23,011 17,777 11,573 4,424
Per Share Amounts:
Net Earnings before Extraordinary
Charge............................... $ 2.01 $ 1.83 $ 1.70 $ 1.78 $ 0.68
Net Earnings........................... 2.01 1.43 1.70 1.78 0.68
Dividends (3).......................... 2.48 2.36 2.20 2.04 0.26
Weighted Average Shares Outstanding......... 17,196 16,071 10,451 6,513 6,464
</TABLE>

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<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cost of Investments....................... $643,261 $547,923 $475,961 $231,751 $142,970
Total Assets.............................. 634,836 551,188 500,731 243,587 144,752
Acquisition Line of Credit................ 6,000 74,690 20,000 14,500 14,083
Long-Term Borrowings...................... 135,659 120,453 133,602 103,573 6,246
Subordinated Convertible Debentures....... 94,810
Shareholders' Equity...................... 383,007 347,129 338,543 122,714 122,510
</TABLE>

- -------------------------
(1) As described in Note 1 to the Consolidated Financial Statements, operations
commenced on August 14, 1992.

(2) As described in Note 13 to the Consolidated Financial Statements, the
Company acquired Health Equity Properties Incorporated on September 30,
1994.

(3) Dividends per share are those declared and paid during such period.

ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The information required by this item is incorporated herein by reference
to the caption "Management's Discussion and Analysis" on Pages 10 through 12 of
the Company's Annual Report to Shareholders, included herein as Exhibit 13.

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is incorporated herein by reference
to the Consolidated Financial Statements included in Pages 13 through 23 of the
Company's Annual Report to Shareholders, included herein as Exhibit 13.

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in Item 1 herein or
incorporated herein by reference to the Company's definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 15, 1997, which was filed
with the Securities and Exchange Commission pursuant to Regulation 14A on March
6, 1997.

ITEM 11 -- EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 15, 1997, which was filed on March 6, 1997 with
the Securities and Exchange Commission pursuant to Regulation 14A.

ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

9
<PAGE> 11

ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K

(a)(1) Listing of Consolidated Financial Statements -- See Index to
Financial Information on Page 4 of Exhibit 13 of this report.

(a)(2) Listing of Financial Statement Schedules -- See Index to Financial
Information on Page 4 of Exhibit 13 of this report.

(a)(3) Listing of Exhibits -- See Index to Exhibits beginning on Page 14 of
this report.

(b) Reports on Form 8-K. There were no reports on Form 8-K filed during the
fourth quarter of 1996.

(d) Financial Statement Schedules -- The following consolidated financial
statement schedules are included herein:

Schedule III Real Estate and Accumulated Depreciation

Schedule IV Mortgage Loan on Real Estate

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.

10
<PAGE> 12

SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E(5) COLUMN F
- -------------------------------- ------------ ------------ ----------------------- ------------------ ---------------
GROSS AMOUNT AT
WHICH CARRIED AT
CLOSE OF PERIOD
INITIAL COST ------------------
TO COMPANY COST CAPITALIZED
------------ SUBSEQUENT TO
ACQUISITION BUILDINGS
BUILDINGS ----------------------- AND LAND
AND LAND CARRYING IMPROVEMENTS ACCUMULATED
DESCRIPTION(1) ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS COSTS TOTAL DEPRECIATION(6)
-------------- ------------ ------------ ------------ -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Advocat, Inc.:
Alabama (LTC)................. $11,638,797 $ 0 $0 $11,638,797 $1,527,726
Arkansas (LTC)................ 37,887,832 0 0 37,887,832 5,094,068
Tennessee (LTC)............... (2) 9,542,121 0 0 9,542,121 1,282,407
Kentucky (LTC)................ (3) 16,149,775 884,589 0 17,034,364 937,091
Ohio (LTC).................... 5,854,186 0 5,854,186 390,272
West Virginia (LTC)........... 5,283,525 153,695 0 5,437,220 289,320
----------- ---------- ----------- ----------
86,356,237 1,038,284 0 87,394,520 9,520,884
Unison Healthcare Corp.:
(formerly BritWill Healthcare
Company):
Indiana (LTC)................. 19,760,000 624,000 0 20,384,000 2,481,741
Texas (LTC)................... 13,810,000 138,515 0 13,948,515 964,396
----------- ---------- ----------- ----------
33,570,000 762,515 0 34,332,515 3,446,137
The Graduate Hospital:
Pennsylvania (MOB)............ 30,031,250 0 0 30,031,250 3,465,325
Liberty Assisted Living Centers
LTD Partnership:
Florida (LTC)................. 5,994,730 760 0 5,995,490 512,638
Regency Health Services, Inc.:
North Carolina (LTC).......... 8,818,000 0 0 8,818,000 860,633
North Carolina (LTC).......... 11,100,131 0 0 11,100,131 529,376
Tennessee (LTC)............... (2) 7,905,139 0 0 7,905,139 608,406
----------- ---------- ----------- ----------
27,823,270 0 27,823,270 1,998,415
Alden Management Services, Inc:
Illinois (LTC)................ 31,000,000 0 0 31,000,000 2,324,883
Emerald Healthcare, Inc.:
Illinois (LTC)................ 2,963,578 0 0 2,963,578 309,667
Indiana (LTC)................. 33,782,788 0 0 33,782,788 2,965,580
----------- ---------- ----------- ----------
36,746,366 36,746,366 3,275,247
ExtendaCare, Inc.:
Indiana (LTC)................. 23,553,634 0 0 23,553,634 2,076,018
Res-Care Health Services, Inc.:
Indiana (LTC)................. 20,470,968 0 0 20,470,968 1,614,977
Kentucky (LTC)................ 8,029,032 0 0 8,029,032 592,965
----------- ---------- ----------- ----------
28,500,000 0 0 28,500,000 2,207,942

<CAPTION>
COLUMN A COLUMN G COLUMN H COLUMN I
- -------------------------------- ---------- ------------------ -----------------

LIFE ON WHICH
DEPRECIATION
IN LATEST
DATE OF DATE INCOME STATEMENTS
DESCRIPTION(1) RENOVATION ACQUIRED IS COMPUTED
-------------- ---------- -------- -----------------
<S> <C> <C> <C>
Advocat, Inc.: 1948-1995
Alabama (LTC)................. August 14, 1992 31.5 years
Arkansas (LTC)................ August 14, 1992 31.5 years
Tennessee (LTC)............... August 14, 1992 31.5 years
Kentucky (LTC)................ July 1, 1994 33 years
Ohio (LTC).................... July 1, 1994 33 years
West Virginia (LTC)........... July 1, 1994 33 years
Unison Healthcare Corp.: 1963-1993
(formerly BritWill Healthcare
Company):
Indiana (LTC)................. December 23, 1992 31.5 years
Texas (LTC)................... December 1, 1993 39 years
The Graduate Hospital: 1929-1984
Pennsylvania (MOB)............ October 28, 1993 27.5 years
Liberty Assisted Living Centers
LTD Partnership: 1989
Florida (LTC)................. September 30, 1994 27 years
Regency Health Services, Inc.: 1974-1986
North Carolina (LTC).......... June 30, 1994 39 years
North Carolina (LTC).......... September 30, 1994 29 years
Tennessee (LTC)............... September 30, 1994 30 years
Alden Management Services, Inc: 1958-1981
Illinois (LTC)................ September 30, 1994 30 years
Emerald Healthcare, Inc.: 1960-1975
Illinois (LTC)................ April 1, 1996 25 years
Indiana (LTC)................. April 1, 1996 25 years
ExtendaCare, Inc.: 1967-1974
Indiana (LTC)................. January 16, 1996 25 years
Res-Care Health Services, Inc.: 1962-1972
Indiana (LTC)................. September 30, 1994 25-30 years
Kentucky (LTC)................ September 30, 1994 30 years
</TABLE>

11
<PAGE> 13
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E(5) COLUMN F
- ------------------------ ------------ --------------- ----------------------- ---------------- ---------------
GROSS AMOUNT AT
WHICH CARRIED AT
CLOSE OF PERIOD
INITIAL COST TO ----------------
COMPANY COST CAPITALIZED
--------------- SUBSEQUENT TO
ACQUISITION BUILDINGS
BUILDINGS ----------------------- AND LAND
AND LAND CARRYING IMPROVEMENTS ACCUMULATED
DESCRIPTION(1) ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS COSTS TOTAL DEPRECIATION(6)
-------------- ------------ ------------ ------------ -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Integrated Health Services,
Inc.:
Washington (LTC)............... $ 10,000,000 $ 0 $0 $ 10,000,000 $ 595,833
Sun Healthcare Group, Inc.:
Iowa (LTC)..................... 2,700,000 0 0 2,700,000 12,237
Illinois (LTC)................. 4,900,000 0 0 4,900,000 67,446
Indiana (LTC).................. 3,000,000 0 0 3,000,000 11,024
Texas (LTC).................... 7,100,000 0 0 7,100,000 96,125
------------ ---------- ------------ -----------
17,700,000 0 0 17,700,000 186,832
Hunter Management Group Inc.:
Florida (LTC).................. 8,150,000 0 0 8,150,000 577,277
Meadowbrook Healthcare of North
Carolina:
North Carolina (LTC)........... 7,500,000 0 0 7,500,000 546,158
Senior Care Properties, Inc.:
Texas (LTC).................... 5,200,000 0 0 5,200,000 291,375
First HealthCare Associates:
Missouri (LTC)................. 9,000,000 0 0 9,000,000 880,103
Miscellaneous Investments:
(4) 13,250,000 0 0 13,250,000 979,037
------------ ---------- - ------------ -----------
$374,375,487 $1,801,559 $0 $376,177,045 $32,884,104
============ ========== ============ ===========

<CAPTION>
COLUMN A COLUMN G COLUMN H COLUMN I
- ------------------------ ---------- ------------------ -----------------

LIFE ON WHICH
DEPRECIATION
IN LATEST
DATE OF DATE INCOME STATEMENTS
DESCRIPTION(1) RENOVATION ACQUIRED IS COMPUTED
-------------- ---------- -------- -----------------
<S> <C> <C> <C>
Integrated Health Services,
Inc.: 1965-1967
Washington (LTC)............... September 1, 1996 20 year
Sun Healthcare Group, Inc.: 1965-1975
Iowa (LTC)..................... August 30, 1996 30 years
Illinois (LTC)................. August 30, 1996 30 years
Indiana (LTC).................. August 30, 1996 30 years
Texas (LTC).................... August 30, 1996 30 years
Hunter Management Group Inc.: 1977-1978
Florida (LTC).................. September 13, 1993 39 years
Meadowbrook Healthcare of North
Carolina: 1984-1985
North Carolina (LTC)........... September 30, 1994 31.5 years
Senior Care Properties, Inc.: 1929-1975
Texas (LTC).................... January 1, 1995 31.5 years
First HealthCare Associates: 1978-1986
Missouri (LTC)................. August 14, 1992 31.5 years
Miscellaneous Investments:
1956-1985 Various 20-39 years
</TABLE>

- ------------------
(1) All of the real estate included in this schedule are being used in either
the operation of long-term care facilities (LTC) or medical office buildings
(MOB) located in the states indicated.
(2) Certain of the real estate indicated are security for Industrial Development
Revenue Bonds totaling $9,150,000 at December 31, 1996.
(3) Certain of the real estate indicated are security for notes payable totaling
$8,159,467 at December 31, 1996
(4) Certain of the real estate indicated are security for HUD loans totaling
$6,964,967 at December 31, 1996

<TABLE>
<CAPTION>
COLUMN E 1994 1995 1996
-------- ---- ---- ----
<S> <C> <C> <C>
(5) Balance at beginning of period.......................... $127,110,000 $334,600,764 $357,556,246
Additions during period:
Acquisitions........................................... 207,018,000 22,747,486 17,700,000
Improvements and other................................. 472,764 207,996 920,799
------------ ------------ ------------
Balance at close of period............................... $334,600,764 $357,556,246 $376,177,045
============ ============ ============
</TABLE>

Additions for 1994 include $165,000,000 stemming from the merger with Health
Equity Properties Incorporated and $4,560,000 from a conversion of a mortgage to
purchase/lease back.

<TABLE>
<CAPTION>
COLUMN F 1994 1995 1996
-------- ---- ---- ----
<S> <C> <C> <C>
(6) Balance at beginning of period.......................... $3,357,328 $ 9,552,587 20,836,153
Additions during period:
Provisions for depreciation............................ 6,195,259 11,283,566 12,047,951
---------- ----------- -----------
Balance at close of period............................... $9,552,587 $20,836,153 $32,884,104
========== =========== ===========
</TABLE>

12
<PAGE> 14

SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------- ------------ ------------------ --------------------------------------------------- --------

FINAL
INTEREST MATURITY PRIOR
DESCRIPTION(1) RATE DATE PERIODIC PAYMENT TERMS LIENS
-------------- -------- -------- ---------------------- -----
<S> <C> <C> <C> <C>
Michigan (13 LTC facilities)... 14.56% August 13, 2007 - Interest payable at 13.56% payable monthly None
- Deferred interest at 1% accrues monthly and is
payable at maturity of the note
- Quarterly amortization of $1,470,000 commencing
in the year 2002
Florida (3 LTC facilities)..... 13.20% August 4, 2012 - Interest payable monthly None
- Quarterly amortization of $50,000 commencing in
the year 2002
Florida (4 LTC facilities)..... 11.50% February 28, 2010 - Interest plus principal of $124,826 payable None
monthly
Florida (2 LTC facilities)..... 11.50% June 4, 2006 - Interest plus principal of $107,382 payable None
monthly
Maine (11 LTC facilities)
Massachusetts (1 LTC
facility)..................... 11.36% September 30, 2000 - Interest payable monthly None
- Quarterly payment of $37,500 commencing in 1996
Texas (6 LTC facilities)....... 11.87% December 31, 2003 - Interest payable monthly None
- Annual amortization of $60,000 commencing in
years 1997-1999 and $120,000 commencing in year
2000
Texas (8 LTC facilities)....... 10.75% Various - Interest plus principal of $105,000 payable None
monthly
Tennessee (2 LTC facilities)... 13.58% April 30, 2001 - Interest payable monthly None
Tennessee (2 LTC facilities)... 12.44% August 1, 2016 - Interest payable monthly None
Ohio (7 LTC facilities)........ 11.00% January 1, 2015 - Interest plus principal of $207,570 payable None
monthly
Other Mortgage Notes:
Various........................ 11% to 13.5% 1998 to 2005 - Interest payable monthly None

<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H
- ------------------------------- ------------ --------------- ----------------
PRINCIPAL AMOUNT
OF LOANS SUBJECT
FACE CARRYING TO DELINQUENT
AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTION(1) MORTGAGES MORTGAGES(2)(3) INTEREST
-------------- --------- --------------- ----------------
<S> <C> <C> <C>
Michigan (13 LTC facilities)... $ 58,800,000 $ 58,800,000 None

Florida (3 LTC facilities)..... $ 7,031,250 $ 7,031,250 None

Florida (4 LTC facilities)..... $ 12,691,500 $ 12,879,505 None

Florida (2 LTC facilities)..... $ 11,090,000 $ 11,084,377 None

Maine (11 LTC facilities)
Massachusetts (1 LTC
facility)..................... $ 26,500,000 $ 26,425,000 None

Texas (6 LTC facilities)....... $ 10,200,000 $ 10,200,000 None

Texas (8 LTC facilities)....... $ 8,597,966 $ 8,597,966 None

Tennessee (2 LTC facilities)... $ 8,932,000 $ 8,932,000 None
Tennessee (2 LTC facilities)... $ 9,300,000 $ 9,300,000
Ohio (7 LTC facilities)........ $ 20,031,888 $ 19,481,229 None

Other Mortgage Notes:
Various........................ $ 50,552,905 $ 44,742,745 None
------------ ------------
$223,727,509 $217,474,072
============ ============
</TABLE>

- -------------------------
(1) The mortgage loans included in this schedule represent first mortgages on
facilities used in the delivery of long-term healthcare, such facilities are
located in the state indicated and are being operated by the indicated
operator.

(2) The aggregate cost for federal income tax purposes is equal to the carrying
amount.

<TABLE>
<CAPTION>
COLUMN G RECONCILIATION 1994 1995 1996
----------------------- ---- ---- ----
<S> <C> <C> <C> <C>
(3) Balance at beginning of period................... $104,641,250 $141,359,387 $158,289,097
Additions during period -- Placements............ 41,334,218 21,131,000 66,222,620
Deductions during period:
Collections of principal......................... (56,081) (850,959) (956,646)
Conversion to purchase/leaseback................. (4,560,000) (3,350,331) (6,080,999)
------------ ------------ ------------
Balance at close of period....................... $141,359,387 $158,289,097 $217,474,072
============ ============ ============
</TABLE>

13
<PAGE> 15

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
3.1 Articles of Incorporation, as amended, of the Registrant,
filed as Exhibit 3.1 to the Registrant's Form 10-Q for the
quarter ended March 31, 1995 and incorporated herein by this
reference. .................................................

3.2 Amended and Restated Bylaws of the Registrant, as amended
August 17, 1993 (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-4 (#33-70612)
dated October 21, 1993).....................................

4.1 Form of Convertible Debenture (Incorporated by reference to
Exhibit 4.2 to the Company's Form S-3 dated February 3,
1997).......................................................

4.2 Form of Indenture (Incorporated by reference to Exhibit 4.2
to the Company's Form S-3 dated February 3, 1997)...........

4.3 Indenture dated December 27, 1993 (Incorporated by reference
to Exhibit 4.2 to the Company's Form S-3 dated December 29,
1993)

4.4 First Supplemental Indenture dated January 23, 1996
(Incorporated by reference to Exhibit 4 to the Company's
Form 8-K dated January 19, 1996)............................

4.5 1993 Stock Option and Restricted Stock Plan, as amended
(Incorporated by reference to Exhibit 10.11 to the Company's
Form 10-Q for the quarterly period ended March 31, 1995)....

8 Opinion of Counsel to the Registrant regarding tax
consequences.*..............................................

10.1 Agreement of Acquisition and Lease by and between the
Registrant and Diversicare Corporation of America dated June
1992 (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement (#33-48268) on Form S-11
effective August 7, 1992)...................................

10.2 Form of Master Lease with Diversicare (Incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement (#33-48268) on Form S-11 effective August 7,
1992).......................................................

10.3 Loan Agreement by and between the Registrant, First Property
Management, Inc., Professional Health Care Management, Inc.,
and certain affiliates dated June 1992, Form of Mortgage
Note for Michigan facilities, and Form of First Amendment to
Michigan Loan Agreement (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement
(#33-48268) on Form S-11 effective August 7, 1992)..........

10.4 Form of Participating Mortgage for Michigan facilities
(Incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement (#33-48268) on Form S-11 effective
August 7, 1992).............................................

10.5 First Amendment to Michigan Loan Agreement by and between
the Registrant and Professional Health Care Management,
Inc., dated August 14, 1992 (Incorporated by reference to
Exhibit 10.3 in the Company's Registration Statement on Form
S-11 (#33-51922) effective October 1, 1992).................

10.6 Support Agreement dated August 14, 1992, whereby the Parent
of Diversicare agrees to support the financial obligations
of Diversicare under the Amended and Restated Agreement of
Acquisition (Incorporated by reference to Exhibit 10.6 to
the Company's Registration Statement (#33-51922) on Form
S-11 effective October 1, 1992).............................
</TABLE>

14
<PAGE> 16
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
10.7 Master Lease, as amended by Amendment Agreement dated
December 22, 1992 (Incorporated by reference to Exhibit 10.2
to the Company's Form 8-K dated December 24, 1992)..........

10.8 Second Amendment to Master Lease, as amended by Amendment
Agreement dated December 24, 1992 (Incorporated by reference
to Exhibit 10.13 to the Company's Form 10-K for the year
ended December 31, 1992)....................................

10.9 1993 Retirement Plan for Directors, effective March 2, 1993
(Incorporated by reference to Exhibit 10.15 to the Company's
Form 10-K for the year ended December 31, 1992).............

10.10 1993 Deferred Compensation Plan, effective March 2, 1993
(Incorporated by reference to Exhibit 10.16 to the Company's
Form 10-K for the year ended December 31, 1992).............

10.11 Form of Note Exchange Agreement -- 10% Senior Notes due July
15, 2000 (Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarterly period ended September
30, 1995)...................................................

10.12 Form of Note Exchange Agreement -- 7.4% Senior Notes due
July 15, 2000 (Incorporated by reference to Exhibit 10.2 to
the Company's Form 10-Q for the quarterly period ended
September 30, 1995).........................................

10.13 Form of Note Purchase Agreement -- 7.4% Senior Notes due
July 15, 2000 (Incorporated by reference to Exhibit 10.25 to
the Company's Form 10-K for the year ended December 31,
1995).......................................................

10.14 Amended and Restated Loan Agreement with Fleet Bank, N.A.,
et al. (Incorporated by reference to the Company's Form 10-Q
for the quarterly period ended June 30, 1996)

11 Statement re: computation of per share earnings*............

13 Excerpts from Omega Healthcare Investors, Inc. Annual Report
to Shareholders for the period ended December 31, 1996, to
the extent referred to in Part II of this Form 10-K*........

21 Subsidiaries of the Registrant*.............................

23 Consent of Independent Auditors*............................
</TABLE>

- -------------------------
* Exhibits which are filed herewith on the indicated sequentially numbered page.

15
<PAGE> 17

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) 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.

By: /s/ DAVID A. STOVER

------------------------------------
David A. Stover
Chief Financial Officer
Dated: March 28, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities on the date indicated .

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER

/s/ ESSEL W. BAILEY, JR. Chairman, President, Chief March 28, 1997
- ------------------------------------------------ Executive Officer, Secretary and
Essel W. Bailey, Jr. Director

PRINCIPAL FINANCIAL OFFICER and
PRINCIPAL ACCOUNTING OFFICER

/s/ DAVID A. STOVER Vice President, Chief Financial March 28, 1997
- ------------------------------------------------ Officer and Chief Accounting
David A. Stover Officer

DIRECTORS

/s/ JAMES A. EDEN Director March 28, 1997
- ------------------------------------------------
James A. Eden

/s/ THOMAS F. FRANKE Director March 28, 1997
- ------------------------------------------------
Thomas F. Franke

/s/ HAROLD J. KLOOSTERMAN Director March 28, 1997
- ------------------------------------------------
Harold J. Kloosterman

/s/ BERNARD J. KORMAN Director March 28, 1997
- ------------------------------------------------
Bernard J. Korman

/s/ EDWARD LOWENTHAL Director March 28, 1997
- ------------------------------------------------
Edward Lowenthal

/s/ ROBERT L. PARKER Director March 28, 1997
- ------------------------------------------------
Robert L. Parker
</TABLE>

<PAGE> 1

EXHIBIT 8

March 20, 1997

Omega Healthcare Investors, Inc.
905 West Eisenhower Circle, Suite 110
Ann Arbor, Michigan 48103

RE: $150,000,000 AGGREGATE OFFERING PRICE OF SECURITIES OF
OMEGA HEALTHCARE INVESTORS, INC.

Gentlemen:

In connection with the registration statement on Form S-3, File No.
333-20967 (the "Registration Statement") filed by Omega Healthcare Investors,
Inc. with the Securities and Exchange Commission on February 3, 1997, regarding
the registration of the Securities under the Securities Act of 1933, as
amended, you have requested our opinion concerning whether the Company has been
organized in conformity with the requirements for qualification as a real
estate investment trust, and whether its proposed method of operation will
enable it to meet the requirements for qualification and taxation as a real
estate investment trust under the Internal Revenue Code of 1986, as amended
(the "Code").

The opinion is based on various facts and assumptions. We have also
been furnished with, and have relied upon , representations made by the Company
with respect to certain factual matters through a certificate of an officer of
the Company.

Based on such facts, assumptions and representations, it is our opinion
that the Company has been organized in conformity with the requirements for
qualification as a real estate investment trust under the Code, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a real estate investment trust under the Code.
No opinion is expressed as to any matter not expressly addressed herein.

This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Also, any variation
or difference in the facts from those set forth in the officer's certificate
furnished to us may affect the conclusions stated herein. Moreover, the
Company's qualification and taxation as a real estate investment trust depends
upon the Company's ability to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Code, the results of which have not and will not be
reviewed by Argue Pearson Harbison & Myers, LLP. Accordingly, no assurance can
be given that the actual results of the Company's operation for any one taxable
year will satisfy such requirements.

This opinion is furnished to you solely for your use in connection with
the Registration Statement. We hereby consent to the filing of this opinion as
an exhibit to the Registration Statement and to the use of our name under the
caption "Legal Matters" in the Registration Statement.

Very truly yours,

ARGUE PEARSON HARBISON & MYERS, LLP.

<PAGE> 1

EXHIBIT 11

STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS EXCEPT
PER-SHARE DATA)
<S> <C> <C> <C>
Primary:
Average shares outstanding................................ 17,196 16,071 10,451
Net effect of dilutive stock options based on the treasury
stock method........................................... * * *
------ ------ ------
Total.................................................. 17,196 16,071 10,451
====== ====== ======
Net earnings before extraordinary charge from prepayment
of debt................................................ 34,590 29,490 17,777
Net earnings.............................................. 34,590 23,011 17,777
Per-share amounts:
Net earnings.............................................. $2.01 $1.43 $1.70
====== ====== ======
Net earnings before extraordinary charge.................. $2.01 $1.83 $1.70
====== ====== ======
Fully Diluted:
Average shares outstanding................................ 17,196
Assumed conversion of debentures.......................... 3,095
Stock option incremental shares........................... 72
------
Total.................................................. 20,363
======
Net earnings.............................................. 34,590
Add interest expense associated with Convertible
Debentures............................................. 7,778
------
Total.................................................. 42,368
======
Per-share amount.......................................... $2.08
======
</TABLE>

- -------------------------
* The aggregate number of stock options outstanding during each period is less
than 3% of the weighted average shares outstanding, and are not materially
dilutive based on the treasury stock method using the average market price for
the year. For 1995 and 1994, incremental shares from stock options on a fully-
diluted basis using the year-end market price if higher than the average
market price are not materially dilutive.

<PAGE> 1

EXHIBIT 13

RESPONSE TO ITEM 14(a)(1) AND (2) AND 14(d)

INFORMATION INCORPORATED BY REFERENCE FROM
ANNUAL REPORT TO SHAREHOLDERS

LISTING OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

INDEX TO FINANCIAL INFORMATION

YEAR ENDED DECEMBER 31, 1996

OMEGA HEALTHCARE INVESTORS, INC.

ANN ARBOR, MICHIGAN

3
<PAGE> 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OMEGA HEALTHCARE INVESTORS, INC.

"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995 Statements that are not historical facts contained
in Management's Discussion and Analysis are forward-looking statements that
involve risks and uncertainties that could cause actual results to differ from
projected results. Some of the factors that could cause actual results to differ
materially include: the financial strength of the operators of the Company's
facilities as it affects their continuing ability to meet their obligations to
the Company under the terms of the Company's agreements with such operators;
changes in operators or ownership of operators; government policy relating to
the healthcare industry, including changes in the reimbursement levels under the
Medicare and Medicaid programs; operators' continued eligibility to participate
in the Medicare and Medicaid programs; changes in reimbursement by other third
party payors; occupancy levels at the Company's facilities; the availability and
cost of capital; the strength and financial resources of the Company's
competitors; the Company's ability to make additional real estate investments at
attractive yields and changes in tax laws and regulations affecting real estate
investment trusts.

Following is a discussion of the consolidated financial condition and
results of operations of the Company which should be read in conjunction with
the consolidated financial statements and accompanying notes.

RESULTS OF OPERATIONS

Year Ended December 31, 1996 compared to Year Ended December 31, 1995

Revenues for the year ended December 31, 1996 totaled $73,127,000,
increasing $11.7 million over 1995 revenues. The 1996 revenue growth stems
primarily from additional investments during 1995 and 1996. A partial year of
revenues from 1996 investments provided revenue increases of approximately $6.1
million, while a full year of revenues from 1995 investments added $3.8 million
to revenues. Additionally, approximately $1.4 million of the revenue growth
stems from participating incremental revenues which became effective during
1996.

Total investments of $643 million as of December 31, 1996 will provide 1997
annualized operating revenues of $77.8 million. Revenues will continue at this
level until additional 1997 investments are made and additional escalation
provisions commence in 1997. Annualized revenues for 1997 represent an $12.7
million increase over the 1996 annualized revenues of $65.1 million based on
investments of $548 million as of January 1, 1996.

Expenses for the year ended December 31, 1996 totaled $38,537,000,
increasing $6.6 million over expenses of $31.9 million for 1995. The 1996
provision for depreciation and amortization of real estate totaled $13,693,000,
increasing $698,000 over 1995. This increase stems from additional investments
funded in 1995 and 1996.

Interest expense for the year ended December 31, 1996 was approximately
$20,836,000, compared with $15.3 million for 1995. The increase in interest
expense is due to higher average borrowings of approximately $88 million, offset
by lower interest rates and reduced amortization of debt issue costs.

General and administrative expenses for 1996 totaled $4,008,000 or
approximately 5.5% of revenues as compared to 5.9% for 1995. The 1996 percentage
decrease relates to economies of scale stemming from additional investments made
in 1996 and 1995.

No provision for Federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. Accordingly, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions

Funds from operations available for distribution for 1996 was $48,989,000,
an increase of $5.5 million from the $43.5 million for 1995. Funds from
operations for the year ended December 31, 1996 totaled

1
<PAGE> 3

$49,008,000, an increase of $6.0 million over the $43.0 million for 1995. The
1996 growth in cash flow is primarily due to the additional investments in 1996
and 1995 and the related increase in operating earnings before provisions for
depreciation and amortization.

Year Ended December 31, 1995 compared to Year Ended December 31, 1994

Revenues for the year ended December 31, 1995 totaled $61,430,000,
increasing $23.7 million over 1994 revenues. The 1995 revenue growth stems
primarily from additional investments during 1994 and 1995. A partial year of
revenues from 1995 investments provided revenue increases of approximately $3.3
million, while a full year of revenues from 1994 investments added $19.4 million
to revenues, including $14.3 million from the September 30, 1994 acquisition of
Health Equity Properties Incorporated ("HEP") as described in Note 13 to the
consolidated financial statements. Additionally, approximately $1.1 million of
the revenue growth stems from participating incremental revenues which became
effective during 1995.

Total investments of $548 million as of December 31, 1995 will provide 1996
annualized operating revenues of $65.1 million. Revenues will continue at this
level until additional 1996 investments are made and additional escalation
provisions commence in 1996. Annualized revenues for 1996 represent an $8.5
million increase over the 1995 annualized revenues of $56.6 million based on
investments of $476 million as of January 1, 1995.

Expenses for the year ended December 31, 1995 totaled $31,940,000,
increasing approximately $12.0 million over expenses of $20 million for 1994.
The 1995 provision for depreciation and amortization of real estate totaled
$12,995,000, increasing $6.3 million over 1994. This increase stems from a full
year provision for 1994 investments ($6 million, including $5.5 million from the
acquisition of HEP), plus a partial year of provision for 1995 investments.

Interest expense for the year ended December 31, 1995 was approximately
$15,325,000, compared with $10.5 million for 1994. The increase in interest
expense is primarily due to an increase in average outstanding borrowings on the
acquisition line of credit, partially offset by lower rates, plus interest on
debt assumed or incurred through the HEP acquisition in 1994.

General and administrative expenses for 1995 totaled $3.6 million or
approximately 5.9% of revenues as compared to 7.2% for 1994. The 1995 percentage
decrease is due to economies of scale resulting from the HEP acquisition and the
additional investments made in 1995.

Funds from operations available for distribution for 1995 was $43,537,000,
an increase of $18.2 million from the $25.3 million for 1994. Funds from
operations for the year ended December 31, 1995 totaled $43.0 million, an
increase of $18.2 million over the $24.8 million for 1994. The 1995 growth in
cash flow is primarily due to the additional investments in 1995 and 1994 and
the increase in operating earnings before provisions for depreciation and
amortization.

LIQUIDITY AND CAPITAL RESOURCES

The Company continually seeks new investments in healthcare properties,
primarily long-term care facilities, with the objective of profitable growth and
further diversification of the investment portfolio. Permanent financing for
future investments is expected to be provided through a combination of private
and public offerings of debt and equity securities. Management believes the
Company's liquidity and various sources of available capital are adequate to
finance operations, fund future investments in additional facilities, and meet
debt service requirements.

At December 31, 1996, the Company has a strong financial position with
total assets of $634.8 million, shareholders' equity of $383.0 million, and
long-term debt of $230.5 million, representing approximately 36% of total
capitalization. (Long-term debt excludes the revolving credit facility to the
extent that it is not term debt.) From January 1, 1997 through February 12,
1997, $16.2 million of subordinated debentures were converted for 565,062 shares
of common stock, reducing the long-term debt-to-total capitalization to
approximately 34%. The Company anticipates maintaining a long-term
debt-to-capitalization ratio of

2
<PAGE> 4

approximately 40%. At year end the Company also has total liquidity of $125
million, represented primarily by permitted borrowings of up to $119 million
under its revolving credit line.

In February 1997, the Company filed two shelf registration statements with
the Securities and Exchange Commission permitting the issuance of up to
$250,000,000 of securities. The Company registered up to $150,000,000 related to
common stock, unspecified debt, preferred stock, and convertible securities
which may be issued from time to time in connection with a Registration
Statement on Form S-3. Additionally, the Company registered on Form S-4 common
stock totaling $100,000,000 to be issued in connection with future property
acquisitions. These Registration Statements, together with availability under
the revolving credit line, provide up to $369 million of capital availability to
the Company.

The Company has demonstrated a strong capacity to access the capital
markets by raising more than $900 million in capital since it was organized in
1992. The Company has raised more than $400 million in equity, including $130
from the initial public offering in 1992, $165 million from the HEP acquisition
in 1994 and two additional offerings, the latest completed in November 1996.
Additionally, nearly $500 million of debt capital has been raised, some of which
has been used to retire secured borrowing debt with higher interest rates. In
1996, the Company completed a placement of $95 million of 8.5% Convertible
Subordinated Debentures due 2001, and executed an agreement to increase its
current bank line of credit facility by $50 million and to extend the term of
the revolving credit agreement to July 1999. The increase in the credit facility
allows for an additional $25 million on the revolving credit facility,
increasing it to $125 million, plus the equivalent of $25 million in a pounds
sterling denominated term loan due in October 2000, for total permitted
borrowings of up to $150 million.

The Company distributes a large portion of the funds from operations
available for distribution. Cash dividends paid totaled $2.48 per share compared
with $2.36 per share for the year ended December 31, 1995. The dividend pay-out
ratio, that is the ratio of per share amounts for dividends paid to funds from
operations was 87% for 1996, compared with 88% for 1995, and 93% for 1994. The
Company believes that cash provided from quarterly operating activities at
current levels will continue to be sufficient to fund normal working capital
requirements and pay 1997 dividends at a quarterly rate of $0.645 per share as
declared at the January 22, 1997 Board of Directors meeting. Cash flow from
operations which is retained by the Company by continuing to gradually reduce
the dividend payout ratio will help to fund additional investments.

New investments generally are funded from temporary borrowings on the
acquisition credit line agreement. The purpose of the acquisition line is to
provide temporary funds for investments in healthcare facilities. Interest cost
incurred by the Company on borrowings under the acquisition line will vary
depending upon fluctuations in prime and/or LIBOR rates, and upon changes in the
Company's ratings by national agencies. Borrowings bear interest at LIBOR plus
1.25% or, at the Company's option at the prime rate. The Company expects to
periodically replace funds drawn on the acquisition line through fixed-rate
long-term borrowings, the placement of convertible debentures, or the issuance
of additional shares of capital stock. Historically, the Company's strategy has
been to match the maturity of its indebtedness with the maturity of its assets
and to employ fixed-rate long-term debt to the extent practicable.

3
<PAGE> 5

INDEX TO FINANCIAL INFORMATION

The following consolidated financial statements of Omega Healthcare
Investors, Inc. and subsidiaries, included on pages 13 through 22 of the Annual
Report of the registrant to its shareholders for the year ended December 31,
1996, are incorporated by reference in Item 8:

Consolidated Balance Sheets -- December 31, 1996 and 1995.

Consolidated Statements of Operations -- Years ended December 31, 1996,
1995 and 1994.

Consolidated Statements of Shareholders' Equity -- Years ended December
31, 1996, 1995 and 1994.

Consolidated Statements of Cash Flows -- Years ended December 31, 1996,
1995 and 1994.

Notes to Consolidated Financial Statements -- December 31, 1996.

The following consolidated financial statement schedules of Omega
Healthcare Investors, Inc. and subsidiaries are included in Item 14(d):

Schedule III Real Estate and Accumulated Depreciation

Schedule IV Mortgage Loan on Real Estate

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are are not
required under the related instructions or are inapplicable and therefore have
been omitted.

4
<PAGE> 6

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Omega Healthcare Investors, Inc.

We have audited the accompanying consolidated balance sheets of Omega
Healthcare Investors, Inc. and subsidiaries as of December 31, 1996, and 1995
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Omega
Healthcare Investors, Inc. and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

Ernst & Young, LLP

January 21, 1997 (Except for
Note 17 as to which the date
is February 12, 1997)

Detroit, Michigan

5
<PAGE> 7

CONSOLIDATED BALANCE SHEETS

OMEGA HEALTHCARE INVESTORS, INC.

<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments in real estate:
Real estate properties -- net............................. $ 343,293 $336,720
Mortgage notes receivable................................. 217,474 158,290
--------- --------
560,767 495,010
Investment in Principal Healthcare Finance Limited.......... 29,970 32,078
Other investments........................................... 19,640 521
--------- --------
610,377 527,609
Cash and short-term investments............................. 6,244 6,426
Non-compete agreements and goodwill -- net.................. 7,605 9,228
Other assets................................................ 10,610 7,925
--------- --------
Total assets................................................ $ 634,836 $551,188
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Acquisition line of credit................................ $ 6,000 $ 74,690
Bank term loan............................................ 25,000
Senior notes.............................................. 81,384 81,384
Other long-term borrowings................................ 29,275 39,069
Subordinated convertible debentures....................... 94,810
Accrued expenses and other liabilities.................... 15,360 8,916
--------- --------
Total liabilities........................................... 251,829 204,059
Shareholders' equity:
Preferred stock $1.00 par value:
Authorized -- 10,000 shares -- none outstanding
Common stock $.10 par value:
Authorized -- 50,000 shares
Issued and outstanding -- 18,175 shares in 1996 and
19,662 shares in 1995................................. 1,817 1,666
Additional paid-in capital................................ 404,310 360,802
Cumulative net earnings................................... 91,375 56,785
Cumulative dividends paid................................. (114,393) (72,071)
Unamortized restricted stock awards....................... (102) (53)
--------- --------
Total shareholders' equity.................................. 383,007 347,129
--------- --------
Total liabilities and shareholders' equity.................. $ 634,836 $551,188
========= ========
</TABLE>

See accompanying notes.

6
<PAGE> 8

CONSOLIDATED STATEMENTS OF OPERATIONS

OMEGA HEALTHCARE INVESTORS, INC.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Rental income............................................. $42,688 $40,335 $22,142
Mortgage interest income.................................. 24,692 18,621 14,578
Other investment income................................... 5,213 2,158 786
Miscellaneous............................................. 534 316 241
------- ------- -------
73,127 61,430 37,747
Expenses:
Depreciation and amortization............................. 13,693 12,995 6,684
Interest.................................................. 20,836 15,325 10,549
General and administrative................................ 4,008 3,620 2,737
------- ------- -------
38,537 31,940 19,970
------- ------- -------
Net earnings before extraordinary charge.................... 34,590 29,490 17,777
Extraordinary charge from prepayment of debt................ 6,479
------- ------- -------
Net earnings................................................ $34,590 $23,011 $17,777
======= ======= =======
Per share:
Net earnings before extraordinary charge.................. $ 2.01 $ 1.83 $ 1.70
Net earnings.............................................. $ 2.01 $ 1.43 $ 1.70
======= ======= =======
Weighted average number of shares outstanding............... 17,196 16,071 10,451
======= ======= =======
</TABLE>

See accompanying notes.

7
<PAGE> 9

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

OMEGA HEALTHCARE INVESTORS, INC.

<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL UNAMORTIZED
NUMBER PAR VALUE PAID-IN CUMULATIVE CUMULATIVE RESTRICTED
OF SHARES AMOUNT CAPITAL NET EARNINGS DIVIDENDS STOCK
--------- --------- ---------- ------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994................ 6,575 $ 657 $120,484 $15,997 $ (14,424)
Issuance of common stock:
Proceeds from March 1994 equity
offering, less offering costs of
$4,858.............................. 3,000 300 67,592
Acquisition of Health Equity
Properties Incorporated............. 5,826 583 142,735
Acquisition of real estate............ 230 23 5,441
Dividend Reinvestment Plan............ 104 11 2,344
Grant of restricted stock (14,000
shares at $25.75 per share), net of
provisions charged to operations.... 14 1 354 $ (78)
Conversion of debentures, net of issue
costs............................... 45 5 945
Redemption of common stock.............. (97) (10) (2,372)
Net earnings for 1994................... 17,777
Dividends paid during 1994 ($2.20 per
share)................................ (19,822)
------ ------ -------- ------- --------- -----
Balance at December 31, 1994.............. 15,697 1,570 337,523 33,774 (34,246) (78)
Issuance of common stock:
Grant of restricted stock (7,699
shares at $24.25 per share), net of
provisions charged to operations.... 7 1 187 25
Dividend Reinvestment Plan............ 964 96 23,183
Stock options exercised............... 8 1 163
Redemption of common stock and other.... (14) (2) (254)
Net earnings for 1995................... 23,011
Dividends paid during 1995 ($2.36 per
share)................................ (37,825)
------ ------ -------- ------- --------- -----
Balance at December 31, 1995.............. 16,662 1,666 360,802 56,785 (72,071) (53)
Issuance of common stock:
Grant of restricted stock (7,995
shares at $26.625 per share), net of
provisions charged to operations.... 8 1 212 (49)
Proceeds from November 1996 equity
offering, less offering costs of
$325................................ 1,000 100 30,075
Dividend Reinvestment Plan............ 482 48 12,755
Conversion of debentures, net of issue
costs............................... 7 1 181
Stock options exercised............... 9 1 223
Other................................. 7 0 62
Net earnings for 1996................... 34,590
Dividends paid during 1996 ($2.48 per
share)................................ (42,322)
------ ------ -------- ------- --------- -----
Balance at December 31, 1996.............. 18,175 $1,817 $404,310 $91,375 $(114,393) $(102)
====== ====== ======== ======= ========= =====
</TABLE>

See accompanying notes.

8
<PAGE> 10

CONSOLIDATED STATEMENTS OF CASH FLOWS

OMEGA HEALTHCARE INVESTORS, INC.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net earnings................................................ $ 34,590 $ 23,011 $ 17,777
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization............................. 13,693 12,995 6,684
Extraordinary charge from prepayment of debt.............. 6,479
Other non-cash charges.................................... 706 1,052 874
-------- -------- --------
48,989 43,537 25,335
Net change in operating assets and liabilities.............. 5,897 1,298 2,364
-------- -------- --------
Net cash provided by operating activities................... 54,886 44,835 27,699
Cash flows from financing activities
Proceeds from issuance of common stock...................... 30,500 72,750
Proceeds from issuance of Subordinated Convertible
Debentures................................................ 95,000
Proceeds from bank term loan................................ 25,000
(Payments) proceeds from acquisition line of credit......... (68,690) 54,690 5,500
Proceeds from other bonds, mortgages and notes payable...... 9,000
Prepayment of Senior Mortgage Notes......................... (88,504)
Proceeds from Senior Unsecured Notes........................ 81,384
Payments of long-term borrowings............................ (9,794) (9,202) (11,603)
Cost of raising capital..................................... (3,048) (800) (6,240)
Transaction deposits received (refunded).................... (2,310) 2,310
Common stock redeemed....................................... (2,382)
Receipts from Dividend Reinvestment Plan.................... 12,803 23,279 2,355
Dividends paid.............................................. (42,322) (37,825) (19,822)
Other....................................................... 327 (51) 1,848
-------- -------- --------
Net cash provided by financing activities................... 39,776 20,661 53,716
Cash flows from investing activities
Acquisition of real estate.................................. (18,621) (22,955) (33,366)
Placement of mortgage loans................................. (66,222) (21,131) (33,368)
Funding of other investments................................ (13,037) 3,350 (3,350)
Investment in Principal Healthcare Finance Limited.......... 2,108 (32,078)
Collection of mortgage principal............................ 957 851 55
Acquisition of Health Equity Properties Incorporated less
cash acquired (Note 13)................................... (2,717)
Payment of acquisition-related liabilities.................. (4,243)
Other....................................................... (29) (58) (98)
-------- -------- --------
Net cash used in investing activities....................... (94,844) (72,021) (77,087)
-------- -------- --------
Increase (decrease) in cash and short-term investments...... (182) (6,525) 4,328
Cash and short-term investments at beginning of year........ 6,426 12,951 8,623
-------- -------- --------
Cash and short-term investments at end of year.............. $ 6,244 $ 6,426 $ 12,951
======== ======== ========
</TABLE>

See accompanying notes.

9
<PAGE> 11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OMEGA HEALTHCARE INVESTORS, INC.

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Omega Healthcare Investors, Inc. (the "Company") was incorporated on March
31, 1992, in the State of Maryland to (a) own and lease, and (b) provide
mortgage financing secured by income-producing healthcare facilities, with a
principal focus on diversified investments in long-term care facilities located
primarily in the United States.

The Company's operations commenced on August 14, 1992, the date of the
closing of the Company's initial public offering and the substantially
simultaneous purchase of its initial facilities. It has elected to be taxed as a
real estate investment trust under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended. The Company intends to continue to qualify as
such and, therefore, will distribute at least 95% of its real estate investment
trust taxable income to its shareholders.

Effective September 30, 1994, the Company acquired all of the common stock
of Health Equity Properties Incorporated. (See Note 13.) Beginning in 1994, the
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries after elimination of all material intercompany
accounts and transactions.

In 1995, the Company began to provide advisory services to Principal
Healthcare Finance Limited, a Company which owns and leases nursing homes in the
United Kingdom. (See Note 4.)

Real Estate Investments

As of December 31, 1996, the Company's real estate investments include
interests in 3 medical office buildings and 214 long-term care facilities,
operated by 34 independent operators.

Investments in real estate properties and mortgage notes are recorded at
cost and original mortgage amount, respectively. The cost of the properties
acquired is allocated between land and buildings based generally upon
independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 39 years.
The Company considers the need to provide for reserves for potential losses on
its investments based on management's periodic review of its portfolio. On the
basis of this review, a provision for losses on investments is not deemed
necessary.

Cash and Short-Term Investments

Short-term investments consist of highly liquid investments with a maturity
date of three months or less when purchased. These investments are stated at
cost which approximates fair value.

Non-Compete Agreements and Goodwill

Non-compete agreements and the excess of the purchase price over the value
of tangible net assets acquired (i.e., goodwill) from the Company's purchase of
Health Equity Properties Incorporated (see Note 13) is amortized on a
straight-line basis over periods ranging from five to ten years. Accumulated
amortization was $3,653,000 and $2,029,000 at December 31, 1996 and 1995,
respectively.

Deferred Financing Costs

Deferred financing costs are amortized on a straight-line basis over the
terms of the related borrowings. Amortization of financing costs totaling
$524,000, $1,072,000 and $1,028,000 in 1996, 1995, and 1994, respectively, is
classified as interest expense in the Consolidated Statements of Operations.
Unamortized deferred financing costs applicable to debt which is converted to
common stock are charged to paid-in capital at the date of conversion.

10
<PAGE> 12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

Revenue Recognition

Rental income and mortgage interest income is recognized as earned over the
terms of the related master leases and mortgage notes, respectively. Such income
includes periodic increases based on pre-determined formulas as defined in the
master leases and mortgage loan agreements. Certain mortgage agreements include
provisions for deferred interest which is not payable by the borrower until
maturity of the related note. The portion of deferred interest recognized as
earned approximates $608,000, $602,000 and $596,000 in 1996, 1995, and 1994,
respectively.

Federal and State Income Taxes

As a qualified real estate investment trust, the Company will not be
subject to Federal income taxes on its income, and no provisions for Federal
income taxes have been made. The reported amounts of the Company's assets and
liabilities as of December 31, 1996 exceeds the tax basis of assets by
approximately $70 million.

Earnings Per Share

Net earnings per share is computed based on the weighted average number of
common shares outstanding during the respective periods. The inclusion of
options using the treasury stock method and the assumed conversion of debentures
is not materially dilutive.

Stock Based Compensation

The Company grants stock options to employees and directors with an
exercise price equal to the fair value of the shares at the date of the grant.
In accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

2. REAL ESTATE PROPERTIES

The Company's real estate properties, represented by 132 long-term care
facilities and 3 medical office buildings at December 31, 1996, are leased under
provisions of master leases with initial terms ranging from 5 to 17 years, plus
renewal options. Substantially all of the master leases provide for minimum
annual rentals which are subject to annual increases based upon increases in the
Consumer Price Index or increases in revenues of the underlying properties, with
certain maximum limits. Under the terms of the leases, the lessee is responsible
for all maintenance, repairs, taxes and insurance on the leased properties.

11
<PAGE> 13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

A summary of the Company's investment in real estate properties is as
follows:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Buildings................................................ $363,404 $345,632
Land..................................................... 12,773 11,924
-------- --------
376,177 357,556
Less accumulated depreciation............................ (32,884) (20,836)
-------- --------
Total.................................................... $343,293 $336,720
======== ========
</TABLE>

The following table summarizes the changes in real estate properties and
accumulated depreciation during 1996 and 1995:

<TABLE>
<CAPTION>
REAL ESTATE ACCUMULATED
PROPERTIES DEPRECIATION
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Balance at January 1, 1994.............................. $127,110 $ 3,357
Additions for 1994.................................... 207,491 6,196
-------- -------
Balance at December 31, 1994............................ 334,601 9,553
Additions for 1995.................................... 22,955 11,283
-------- -------
Balance at December 31, 1995............................ 357,556 20,836
Additions for 1996.................................... 18,621 12,048
-------- -------
Balance at December 31, 1996............................ $376,177 $32,884
======== =======
</TABLE>

Additions for 1994 include $165 million stemming from the acquisition of
HEP. (See Note 13.)

The future minimum rentals expected to be received for the remainder of the
initial terms of the leases are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................ $ 43,440
1998........................................................ 43,855
1999........................................................ 43,690
2000........................................................ 42,656
2001........................................................ 41,878
Thereafter.................................................. 148,373
--------
$363,892
========
</TABLE>

3. MORTGAGE NOTES RECEIVABLE

Mortgage notes receivable relate to 82 long-term care facilities. The
mortgage notes are secured by first mortgage liens on the borrowers' underlying
real estate and personal property. Through December 31, 1996, principal payments
have been made pursuant to the terms of the underlying mortgage agreements.
Based on

12
<PAGE> 14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

management's review, no provision for loss is considered necessary. The
following table summarizes the changes in mortgage notes during 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at January 1..................................... $158,290 $141,360
New mortgage notes..................................... 66,222 21,131
Conversion/reclassification............................ (6,081) (3,350)
Collection of principal................................ (957) (851)
-------- --------
Balance at December 31................................... $217,474 $158,290
======== ========
</TABLE>

The face amount of mortgage notes receivable follow:

<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Participating mortgage note due 2007; interest at 13.56%
payable monthly, plus amortization of $1,470,000 per
quarter commencing in 2002............................. $ 58,800 $ 58,800
Participating mortgage note due 2012; interest at 13.2%
payable monthly, plus amortization of $50,000 per
quarter commencing in 2002............................. 7,031 7,031
Participating mortgage note due 2000; interest at 11.36%
payable monthly........................................ 26,425 26,500
Convertible participating mortgage note due 2003;
interest at 11.87% payable monthly, plus annual
amortization of $60,000 for 1997 to 1999, and $120,000
commencing in 2000..................................... 10,200 10,200
Convertible participating mortgage note due 2001; monthly
interest payments at 13.5% with principal due at
maturity............................................... 8,932 8,932
Mortgage notes due 2015; monthly payments of $208,000,
including interest at 11.0%............................ 19,481 19,779
Mortgage notes due 2000 and 2016, monthly interest
payments at 12.44%..................................... 9,300 9,300
Mortgage note due 2010; monthly payment of $124,826,
including interest at 11.5%............................ 12,880
Mortgage note due 2006; monthly payment of $107,382,
including interest at 11.5%............................ 11,084
Other mortgage notes..................................... 37,977 11,748
Other participating mortgage notes....................... 10,423 6,000
Other convertible participating mortgage notes........... 4,941
-------- --------
$217,474 $158,290
======== ========
</TABLE>

The stated interest rates indicated above for Participating Mortgages and
Convertible Participating Mortgages are subject to annual increases based upon
increases in the Consumer Price Index or increases in revenues of the underlying
long-term care facilities, with certain maximum limits. Certain of the mortgage
notes, designated as "Convertible Participating" also permit the Company to
convert the note into ownership of the related real and personal property.
Conversions would generally result in purchase/leaseback transactions with
annual economic benefit to the Company substantially the same as under the
mortgage notes.

13
<PAGE> 15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

The estimated fair value of the Company's mortgage loans at December 31,
1996 is approximately $245,700,000. Fair value is based on the estimates of
management and on rates currently prevailing for comparable loans.

On the basis of contractual provisions of the various agreements, the
principal balances of mortgage notes receivable as of December 31, 1996, are
expected to mature or to be converted to purchase/leaseback transactions
approximately as follows: $2,347,000 in 1997, $2,057,000 in 1998, $1,166,000 in
1999, $28,357,000 in 2000, $13,152,000 in 2001 and $170,395,000 thereafter.

4. INVESTMENT IN PRINCIPAL HEALTHCARE FINANCE LIMITED

In July, 1995, the Company formed and provided the initial funding for
Principal Healthcare Finance Limited ("Principal"), an Island of Jersey based
company organized to purchase and lease back nursing homes in the United
Kingdom. The Company also manages and provides advisory services to Principal
under a renewable contract. Principal owns and leases 42 nursing homes acquired
at a cost of $116 million as of December 31, 1996.

The Company's initial funding for Principal included approximately
$24,000,000 in the form of a sterling denominated subordinated loan due December
31, 2000. Through October 31, 1996 the Company also provided temporary advances
to Principal, including approximately $8,000,000 under a related subordinated
loan agreement. In October 1996, Principal completed a private placement of
equity to unaffiliated investors. Following the completion of the private
placement, the Company owns directly or indirectly non-voting ordinary shares of
Principal, with total equity investment approximating $7,000,000. The Company's
non-voting ownership interest is stated on the basis of cost.

5. CONCENTRATION OF RISK

As of December 31, 1996, 96% of the Company's real estate investments
related to long-term care facilities. The Company's facilities are located in 24
states and are operated by 34 independent healthcare operating companies.
Approximately 55% of the Company's real estate investments are operated by 8
public companies: Advocat, Inc. (18.7%), GranCare, Inc. (9.9%), Regency Health
Services, Inc. (7.8%), Unison Healthcare Corp. (7.5%), Res-Care, Inc. (4.8%),
Sun Healthcare Group, Inc. (3.0%), Integrated Health Services, Inc. (1.9%) and
Horizon/CMS Healthcare Corp. (1.8%). Of the remaining 26 independent operators,
none operate investments in facilities representing more than 8.1% of the total
real estate investments.

6. LIQUIDITY DEPOSITS AND ADDITIONAL SECURITY

Liquidity deposits and letters of credit received from certain operators
pursuant to leases and mortgages total $21,512,000. These generally represent
the initial monthly rental and mortgage interest income for a period of six
months with respect to certain of the investments. The deposits consist of
$11,065,000 held by the Company, $5,047,000 held by escrow agents, and
$5,400,000 in the form of letters of credit.

Additional security for rental and mortgage interest revenue from operators
is provided by covenants regarding minimum working capital and net worth, liens
on accounts receivable and other operating assets of the operators, provisions
for cross default, provisions for cross collateralization and by
corporate/personal guarantees.

7. BORROWING ARRANGEMENTS

On July 17, 1995, the Company consummated a $100,000,000 unsecured
revolving line of credit facility, which replaced a $60,000,000 secured line of
credit. The 1995 agreement was amended and restated on June 6, 1996, increasing
the facility to $150,000,000. The amended facility provides a pounds sterling

14
<PAGE> 16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

denominated 40-month term loan for the equivalent of $25,000,000, which was
fully drawn at December 31, 1996. At the Company's option, the interest rate on
the term loan can be fixed for the entire term of the loan. The amended facility
also permits additional pounds sterling denominated borrowings for the
equivalent of approximately $25,000,000. Borrowings bear interest at LIBOR plus
1.25% or, at the Company's option at the prime rate. The underlying revolving
credit agreement contains various covenants and expires on July 1, 1999. Total
borrowings available under the agreement ($119,000,000 at December 31, 1996) are
based upon levels of eligible real estate investments.

Borrowings of $6,000,000 at December 31, 1996 bear interest at a rate of
7.43% and borrowings of $74,690,000 at December 31, 1995 bear interest at 7.45%.

The following is a summary of long-term borrowings:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Unsecured borrowings:
Bank term loan due October 2000...................... $ 25,000 $
Senior Unsecured Notes due July 2000................. 81,384 81,384
7% Unsecured Note.................................... 5,000 5,000
Subordinated Convertible Debentures.................... 94,810
-------- --------
206,194 86,384
Secured borrowings:
Industrial Development Revenue Bonds................. 9,150 8,920
HUD loans............................................ 6,965 15,901
Mortgage notes payable to bank....................... 8,160 9,248
-------- --------
24,275 34,069
-------- --------
Total long-term borrowings............................. $230,469 $120,453
======== ========
</TABLE>

In 1995, the Company exchanged 9.88% Senior Subordinated Collateralized
Mortgage Accrual Notes for 10% Unsecured Senior Notes due July 15, 2000. The
Company also exchanged the entire outstanding balance of 7.11% Senior Mortgage
Collateralized Notes for approximately $37,065,000 of 7.40% Unsecured Notes due
July 15, 2000, plus cash of approximately $6 million. The effective interest
rate for the new unsecured notes is 8.8%, with interest-only payments due
semi-annually through July 2000.

On January 24, 1996, the Company issued $95 million of 8.5% Convertible
Subordinated Debentures (the Debentures) due 2001. The Debentures are
convertible at any time into shares of Common Stock at a conversion price of
$28.625 per share. The Debentures are unsecured obligations of the Company and
are subordinate in right and payment to the Company's senior unsecured
indebtedness. As of December 31, 1996 there were 3,312,139 shares reserved for
issuance under the Debentures. (See Note 17.)

Real estate investments with an original cost of approximately $32,600,000
are secured by outstanding secured borrowings totaling $24,275,000 at December
31, 1996. The Industrial Development Revenue Bonds are payable in monthly
installments of approximately $88,000, including interest at approximately 9.6%.
HUD loans are payable in monthly installments of approximately $66,000,
including interest at approximately 8.3%. Mortgage notes are payable in monthly
installments of approximately $90,000, including interest at approximately 9.7%.

15
<PAGE> 17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

Assuming none of the Company's borrowing arrangements are refinanced,
converted or prepaid prior to maturity, required principal payments for each of
the five years following December 31, 1996 and the aggregate due thereafter are
set forth below:

<TABLE>
<S> <C>
1997........................................................ $ 386,000
1998........................................................ 423,000
1999........................................................ 461,000
2000........................................................ 114,183,000
2001........................................................ 95,096,000
Thereafter.................................................. 19,920,000
------------
$230,469,000
============
</TABLE>

The estimated fair values of the Company's long-term borrowings at December
31, 1996 is approximately $236,128,000. Fair values are based on the estimates
of management and on rates currently prevailing for comparable loans.

8. FINANCIAL INSTRUMENTS

At December 31, 1996 and 1995, the carrying amounts and fair values of the
Company's financial instruments are as follows:

<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and short-term investments............ $ 6,244 $ 6,244 $ 6,426 $ 6,426
Mortgage notes receivable.................. 217,474 245,700 158,290 173,000
Other investments.......................... 49,610 52,691 32,599 32,599
Liabilities:
Acquisition line of credit................. 6,000 6,465 74,690 74,690
Bank term loan............................. 25,000 26,935
Senior Unsecured Notes..................... 81,384 86,194 81,384 87,000
Subordinated Convertible Debentures........ 94,810 94,810
Other long-term borrowings................. 29,275 28,189 39,069 40,171
</TABLE>

Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument. The use of different market assumptions and estimation
methodologies may have a material effect on the reported estimated fair value
amounts. Accordingly, the estimates presented above are not necessarily
indicative of the amounts the Company would realize in a current market
exchange.

9. RETIREMENT ARRANGEMENTS

The Company has a 401(k) Profit Sharing Plan covering all eligible
employees. Under the Plan, employees are eligible to make contributions, and the
Company, at its discretion, may match contributions and make a profit sharing
contribution.

In 1993, the Company adopted the 1993 Retirement Plan for Directors, an
unfunded plan covering all members of the Board of Directors upon completion of
not less than five years service on the Board. The benefits payable upon
retirement from the Board are based on years of service and the director fees in
effect as of the date the director ceases to be a member of the Board.

16
<PAGE> 18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

In 1993, the Company also adopted the 1993 Deferred Compensation Plan which
covers all eligible employees and members of the Board. Under this unfunded
plan, the Company may award units which result in participation in the dividends
and future growth in the value of Company's common stock. The total number of
units permitted by the plan is 200,000. Units awarded to eligible participants
(63,500 units at December 31, 1996) vest over a period of five years based on
the participant's initial service date.

Provisions charged to operations with respect to these retirement
arrangements totaled $654,000 in 1996, $366,000 in 1995 and $283,000 in 1994.

10. SHAREHOLDERS' EQUITY AND STOCK OPTIONS

Under the terms of the 1993 Stock Option and Restricted Stock Plan as
amended in 1995, the Company reserved 750,000 shares of common stock for grants
to be issued during a period of up to 10 years. Directors, officers, and key
employees are eligible to participate in the Plan. Options for 295,165 shares
have been granted to eligible participants. Additionally, 28,244 shares of
restricted stock have been granted under the provisions of the Plan. The market
value of the restricted shares on the date of the award has been recorded as
unearned compensation-restricted stock, with the unamortized balance shown as a
separate component of shareholders' equity. Unearned compensation is amortized
to expense over the vesting period, with charges to operations of $240,000,
$253,000 and $157,000 in 1996, 1995 and 1994, respectively.

The following is a summary of activity under the plan.

<TABLE>
<CAPTION>
STOCK OPTIONS
-------------------------------------------
NUMBER OF WEIGHTED
SHARES EXERCISE PRICE AVERAGE PRICE
--------- -------------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1994.......... 97,500 $21.125-$25.000 $21.54
Granted during 1994..................... 102,250 24.625- 25.750 25.63
------- --------------- ------
Outstanding at December 31, 1994........ 199,750 21.125- 25.750 23.63
Granted during 1995..................... 48,000 24.250- 26.625 24.79
Exercised............................... (7,666) 21.125- 25.750 21.64
Canceled................................ (9,084) 21.125- 25.750 23.40
------- --------------- ------
Outstanding at December 31, 1995........ 231,000 21.125- 26.625 23.95
Granted during 1996..................... 83,500 26.625- 30.000 26.84
Exercised............................... (9,499) 21.500- 25.750 23.67
Canceled................................ (27,001) 24.250- 26.625 25.81
------- --------------- ------
Outstanding at December 31, 1996........ 278,000 $21.125-$30.000 $24.64
======= =============== ======
</TABLE>

At December 31, 1996, options currently exercisable (155,162) have a
weighted average exercise price of $23.42. Shares available for future grants as
of December 31, 1996 and December 31, 1995 were 426,591 and 506,385
respectively.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard prescribes a fair value based method of
accounting for employee stock options or similar equity instruments and requires
certain pro forma disclosures. For purposes of the pro forma disclosures
required under Statement 123, the estimated fair value of the options is
amortized to expense over the option's vesting period. Based on the Company's
option activity, net earnings and net earnings per share on a pro forma basis
does not differ significantly from that determined under APB 25. In determining
the estimated fair value of the Company's stock options as of the date of grant,
a Black-Scholes option pricing model was used with the following
weighted-average assumptions: risk-free interest rates of 6.5%; a dividend yield
of 7.25%; volatility factors of

17
<PAGE> 19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

the expected market price of the Company's common stock at 15%; and a
weighted-average expected life of the options of 8 years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

11. DIVIDENDS

In order to qualify as a real estate investment trust, the Company must,
among other requirements, distribute at least 95% of its real estate investment
trust taxable income to its shareholders. Per share dividend payments by the
Company were characterized in the following manner for income tax purposes:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Ordinary income.................................. $2.232 $2.124 $2.156
Capital gain income..............................
Return of capital................................ .248 .236 .044
------ ------ ------
Total dividends paid............................. $ 2.48 $ 2.36 $ 2.20
====== ====== ======
</TABLE>

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Following are details of changes in operating assets and liabilities
(excluding the effects of noncash expenses), and other noncash transactions:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash from changes in
operating assets and liabilities:
Operating assets............................ $ (211) $ (97) $(1,016)
Operating liabilities including interest
accrued of $6,307 in 1996................ 6,108 1,395 3,380
------- ------- -------
$ 5,897 $ 1,298 $ 2,364
======= ======= =======
Other noncash investing and financing
transactions:
Acquisition of real estate:
Value of real estate acquired............ $ 9,125
Real estate mortgages assumed............ (3,661)
Common stock issued...................... (5,464)
Common stock issued for conversion of
debentures............................... 950 950
Interest paid during the period............... $13,939 $13,171 $ 6,784
</TABLE>

18
<PAGE> 20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

The following are detailed cash flows for the acquisition of Health Equity
Properties Incorporated for the year ended December 31, 1994.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair market value of real estate investments acquired....... $(165,000)
Other assets acquired, excluding cash....................... (15,591)
Common stock issued......................................... 143,318
Long-term borrowings assumed................................ 26,186
Acquisition-related obligations............................. 7,491
Other obligations........................................... 879
---------
Net cash used............................................... $ (2,717)
=========
</TABLE>

13. ACQUISITION OF HEALTH EQUITY PROPERTIES INCORPORATED

On September 30, 1994, the Company acquired all the outstanding 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 ($26 million) and other obligations, professional
fees and costs incurred in the transaction.

The acquisition was accounted for as a purchase, with the acquired assets
and liabilities recorded at their estimated fair values at the date of the
acquisition. Presented below are unaudited pro forma condensed consolidated
results of operations for the year ended December 31, 1994, as if the purchase
occurred as of January 1, 1994. The pro forma results of operations give effect
to depreciation associated with the increase in the estimated fair values of the
facility investments based on useful lives ranging from 25 to 30 years. Effect
is also given to the amortization of non-compete agreements and goodwill from
the acquisition, based on useful lives ranging from 5 to 10 years, and for the
anticipated cost savings due to personnel reductions and other efficiencies of
scale. The following pro forma results of operations are presented for
comparative purposes only, and they are not necessarily indicative either of
results that would have occurred had the transaction been effected as of January
1, 1994, or of future results of operations of the consolidated companies.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Revenues:
Rental............................................. $36,206
Mortgage interest.................................. 14,578
Other.............................................. 1,465
----------
52,249
Expenses:
Depreciation and amortization...................... 12,810
Interest........................................... 12,518
General and administrative......................... 3,202
----------
28,530
----------
Net earnings before gain on sale..................... 23,719
----------
Gain on property sale................................ 2,590
----------
Net earnings......................................... $26,309
==========
Net earnings per share:
Before gain on sale................................ $1.61
Net earnings....................................... 1.78
Weighted average number of shares outstanding........ 14,770
</TABLE>

19
<PAGE> 21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

14. EXTRAORDINARY CHARGE FOR PREPAYMENT OF DEBT

During 1995, the Company entered into three transactions to prepay various
secured borrowings. The Company consummated a $100,000,000 unsecured line of
credit to replace a $60,000,000 secured line of credit. Also, as discussed in
Note 7, the Company redeemed its outstanding senior mortgage notes through the
issuance of unsecured notes. The prepayment of these borrowings resulted in an
extraordinary charge of $6,479,000, representing the write-off of unamortized
deferred financing costs and fees and costs associated with the prepayment.

15. LITIGATION

The Company is subject to certain legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability, if any, with respect to these actions will not materially
affect the consolidated financial position of the company.

16. COMMITMENTS

The Company has commitments, subject to certain conditions, to provide
additional financing totaling $29 million as of December 31, 1996.

17. SUBSEQUENT EVENTS

A quarterly dividend of $.645 per share was declared by the Board of
Directors on January 22, 1997, payable on February 14, 1997 to shareholders of
record on February 3, 1997.

Through February 12, 1997, $16,175,000 of subordinated convertible
debentures were converted for 565,062 shares of common stock.

<PAGE> 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OMEGA HEALTHCARE INVESTORS, INC.

EXHIBIT 21

LIST OF SUBSIDIARIES

OMEGA HEALTHCARE INVESTORS, INC.

<TABLE>
<CAPTION>
JURISDICTION OF
NAMES INCORPORATION
----- ---------------
<S> <C>
Bayside Street, Inc. ....................................... Maryland
OHI (Kansas), Inc. ......................................... Kansas
OHI (Illinois), Inc. ....................................... Illinois
OHI (Florida), Inc. ........................................ Florida
OHI (Clemmons), Inc. ....................................... North Carolina
OHI (Greensboro), Inc. ..................................... North Carolina
Sterling Acquisition Corp. ................................. Kentucky
Sterling Acquisition Corp. II............................... Kentucky
OS Leasing.................................................. Kentucky
Omega (UK) Limited.......................................... London, England
</TABLE>

<PAGE> 1
EXHIBIT 23

CONSENT AND REPORT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in (1) the Registration Statement
No. 33-67084 dated August 6, 1993 related to the 1993 Stock Option and
Restricted Stock Plan, (2) the Registration Statement No. 33-308415 on Form S-3
dated July 19, 1996 related to the Dividend Reinvestment and Common Stock
Purchase Plan, (3) Shelf Registration Statement No. 33-320967 on Form S-3 dated
February 3, 1997, and (4) Shelf Registration Statement No. 33-32119 on Form S-4
dated February 4, 1997, of our report dated January 21, 1997 (except for Note
17 as to which the date is February 12, 1997) with respect to the consolidated
financial statements and schedules of Omega Health Care Investors, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 1996.

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Omega Healthcare Investors, Inc. of our report dated January 21, 1997
(except for Note 17, as to which the date is February 12, 1997), included in
the 1996 Annual Report to Shareholders of Omega Healthcare Investors, Inc.

Our audit also included the financial statement schedules of Omega Healthcare
Investors, Inc. listed in Item 14(a). These schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audit. In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.

/s/ ERNST & YOUNG
ERNST & YOUNG

March 28, 1997
Detroit, Michigan

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FILED AS PART OF THE ANNUAL REPORT ON FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INFORMATION IN FORM
10-K.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,244
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 634,836
<CURRENT-LIABILITIES> 0
<BONDS> 230,469
0
0
<COMMON> 0
<OTHER-SE> 383,007
<TOTAL-LIABILITY-AND-EQUITY> 634,836
<SALES> 0
<TOTAL-REVENUES> 73,127
<CGS> 0
<TOTAL-COSTS> 13,693
<OTHER-EXPENSES> 4,008
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,836
<INCOME-PRETAX> 34,590
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,590
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 2.01<F1>
<FN>
<F1>EPS FULLY DILUTED NOT SEPARATELY REPORTED BECAUSE INCLUSION OF OPTIONS USING
TREASURY STOCK METHOD AND THE ASSUMED CONVERSION OF DEBENTURES IS NOT
MATERIALLY DILUTIVE.
</FN>

</TABLE>