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, 1997, Principal owned 154 properties for which it has invested L215 million (approximately $354 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.
In November, 1997 the Company formed Omega Worldwide, Inc. (Worldwide), a company which will provide investment advisory and management services and hold equity and debt interests in companies engaged in providing sale/leaseback and other capital financing to healthcare service providers throughout the world. In connection with the formation of Worldwide, the Company will receive on or about April 1, 1998, 8.5 million shares of Worldwide common stock and rights to receive up to 5,000,000 shares of Series B Preferred Stock in exchange for substantially all of the Company's interests in Principal. The Company's interests in Principal which will be exchanged for its ownership in Worldwide include: (a) 3,337,500 ordinary shares of Principal and warrants to purchase 10 million ordinary shares of Principal expiring June 30, 2001 at an exercise price of L1.50 (approximately $2.40) per share and 554,583 ordinary shares of Principal expiring December 31, 2000 at an exercise price of L1.00 (approximately $1.60) per share; (b) the Company's right to payment of L15 million (approximately $24 million) from the Sterling denominated subordinated loan; (c) the Company's interest in a ten-year British pound currency swap contract under which Omega Worldwide, Inc. will have the right to exchange L20,000,000 for $31,740,000 on October 15, 2007; (d) and the Amended and Restated Advisory Services Agreement between the Company and Principal. The Company will retain 900,000 Class A Voting Shares of Principal.
Omega Worldwide, Inc. has filed a Registration Statement with respect to rights to acquire 2,250,000 shares of its common stock, 500,000 shares to be sold in a primary offering and 2.3 million shares to be sold in a secondary offering by the Company. Each common shareholder of the Company will receive a pro-rata share of approximately 5.2 million common shares of Omega Worldwide, Inc. and will be eligible to receive a portion of the 2.25 million rights to purchase Omega Worldwide, Inc. common stock. The Company will retain a 9% interest in Omega Worldwide, Inc. The date of the distribution of Omega Worldwide, Inc. shares has not been set since it depends upon, among other matters, the date of approval by the Securities and Exchange Commission of the Registration Statement. As of the date of the distribution, the cost of assets transferred to Omega Worldwide, Inc., less the net proceeds of the secondary offering received by the Company, will be charged to shareholders' equity in the form of a special dividend. Management estimates the special dividend will approximate $10 million.
As of December 31, 1997, the Company's portfolio of domestic investments consisted of 258 long-term care facilities, 3 medical office buildings and 2 rehabilitation hospitals. The Company owns and leases 178 long-term facilities, 3 medical office buildings and 2 rehabilitation hospitals, and provides mortgages, including participating and convertible participating mortgages, on 80 long-term healthcare facilities. The facilities are located in 26 states and operated by 29 unaffiliated operators. The Company's gross real estate investments at December 31, 1997 totaled $779.4 million. During 1997, new investments approximated $196 million as a result of entering into sale/leaseback transactions and making mortgage loans and other investments.
At March 6, 1998, the Company employed 26 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 (734) 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 creditworthiness of the operator of the facility; (ii) the adequacy of the facility's historical, current and forecasted cash flow to meet operational needs, capital expenditures and lease or debt service obligations; (iii) the construction quality, condition and 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 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 intends to diversify prudently into other types of healthcare facilities or other properties. The Company actively seeks to diversify its investments in terms of geographic location, operators and facility types.
A fundamental investment strategy of the Company is to obtain contractual rent escalations under long-term, non-cancelable, triple-net leases (whereby the tenant is responsible for all maintenance, repairs, taxes and insurance on the leased properties) and revenue participation through participating mortgage loans, and to obtain substantial security 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 are intended to 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 the property at set dates at prices based on specified formulas. The average annualized yield from leases was 11.57% at January 1, 1998.
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 purchase the Company's option at prices based on specified formulas. The average annualized yield on these mortgages was approximately 12.75% at January 1, 1998.
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 14.36% at January 1, 1998.
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 11.16% at January 1, 1998.
The table set forth in Item 2
ITEM 2 -- PROPERTIES
At December 31, 1997, the Company's real estate investments were in long-term care facilities, medical office buildings and rehabilitation hospitals. 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 26 states and are operated by 29 unaffiliated operators. Basic information regarding investments as of December 31, 1997 is as follows:
- ------------------------- N/A -- Data are not reported or not applicable.
The distribution of real estate investments by investment type and state is as follows:
ITEM 3
ITEM 3 -- LEGAL PROCEEDINGS
There were no legal proceedings pending as of December 31, 1997, 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
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.
PART II
ITEM 5
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:
The closing price on February 27, 1998 was $38.8125 per share. As of February 27, 1998, there were 19,635,322 shares of common stock outstanding with approximately 3,200 registered holders and approximately 30,000 beneficial owners.
ITEM 6
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 1997 Annual Report to Shareholders, which is included herein as Exhibit 13.
- ------------------------- (1) The Company acquired Health Equity Properties Incorporated on September 30, 1994.
(2) Dividends per share are those declared and paid during such period.
ITEM 7
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 8 through 10 of the Company's Annual Report to Shareholders, included herein as Exhibit 13.
ITEM 8
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 11 through 23 of the Company's Annual Report to Shareholders, included herein as Exhibit 13.
ITEM 9
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10
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 May 7, 1998 at 11:00 a.m. EST, which will be filed on or about April 1, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A.
ITEM 11
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 May 7, 1998 at 11:00 a.m. EST, which will be filed on or about April 1, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A.
ITEM 12
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 May 7, 1998, which will be filed on or about April 1, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A.
ITEM 13
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 May 7, 1998, which will be filed on or about April 1, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A.
PART IV
ITEM 14
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 of Exhibit 13 of this report.
(a)(2) Listing of Financial Statement Schedules -- See Index to Financial Information on Page of Exhibit 13 of this report.
(a)(3) Listing of Exhibits -- See Index to Exhibits beginning on Page 16 of this report.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed during the fourth quarter of 1997:
Form 8-K dated November 10, 1997: Report with the following exhibits:
Bylaws of Omega Healthcare Investors, Inc. as Amended and Restated on October 15, 1997
Second Amended and Restated Loan Agreement by and among Omega Healthcare Investors, Inc., the banks signatory hereto and Fleet Bank, N.A., as agent for such banks, dated September 30, 1997
(c) Exhibits -- See Index to Exhibits beginning on Page 16 of this report.
(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.
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION OMEGA HEALTHCARE INVESTORS, INC. DECEMBER 31, 1997
- ------------------ (1) All of the real estate included in this schedule are being used in either the operation of long-term care facilities (LTC), rehabilitation hospitals (RH) 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 $8,980,000 at December 31, 1997. (3) Certain of the real estate indicated are security for notes payable totaling $7,900,628 at December 31, 1997. (4) Certain of the real estate indicated are security for HUD loans totaling $5,380,148 at December 31, 1997.
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE OMEGA HEALTHCARE INVESTORS, INC. DECEMBER 31, 1997
- ------------------------- (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 states indicated.
(2) The aggregate cost for federal income tax purposes is equal to the carrying amount.
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 27, 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.
INDEX TO EXHIBITS
- ------------------------- * Exhibits which are filed herewith on the indicated sequentially numbered page.