Omega revises profit up 16%

Timonium REIT realized 2 gains

December 16, 2006|By M. William Salganik | M. William Salganik,sun reporter

Omega Healthcare Investors Inc., a Timonium real estate investment trust, yesterday restated earnings for the past 3 1/2 years -- upward, by 16 percent.

Earnings restatements are often an admission that a company has inflated profits, but that wasn't the case here. "Usually, it has much more negative connotations," said Charles W. Place, a REIT analyst at Ferris, Baker Watts Inc. in Baltimore. "I still hold a positive view on the company."

Omega owns or holds mortgages on more than 200 nursing homes and assisted-living facilities in 27 states and contracts with operating companies to run them.

The main accounting problem stems from 2000, a time when the long-term-care industry was in deep trouble. Medicare cut its reimbursement rates in 1999, and five of the seven largest companies filed for bankruptcy reorganization in 1999 and 2000.

One of the operating companies that contracted with Omega, Advocat Inc., defaulted on its contract. "There was a question whether Advocat could survive without filing for bankruptcy," C. Taylor Pickett, chief executive officer of Omega, told analysts in a conference call yesterday.

The two sides worked out a new contract that gave Omega shares of Advocat stock. The stock "had little or no value," Pickett said yesterday, and therefore wasn't shown as an asset on the balance sheet.

Since then, however, Advocat has recovered. From a price of 31 cents at the time of the reworked deal in 2000, Advocat shares reached $18.84 in October. Omega recognized that its financial reports needed to reflect the value of that asset.

In the course of its accounting review, it also was advised by its auditors, Ernst & Young, that it needed to change how it accounted for revenue from leases where rent increases were based on cost-of-living increases. This, too, resulted in more revenue, Omega said in filings with the Securities and Exchange Commission.

Together, the increased value of the Advocat shares and the changed accounting for lease revenue added $17.4 million to earnings over the period. Partially offsetting that, Omega potentially owes up to $5.6 million in taxes, "although the ultimate obligation may be substantially less," Pickett said.

"No good deed goes unpunished," was the headline on a research note by Jerry L. Doctrow, managing director and health analyst at Stifel, Nicolaus & Co. Inc. in Baltimore. Doctrow said he meant that Omega had "negotiated lots of good workouts that created value for the shareholders" in 2000, but had to go through the restatement process.

Omega said it expected funds from operations, a closely watched metric for REITs, for 2007 to be $1.32 to $1.36 a share, up from projections in October of $1.21 to $1.26.

For the quarter that ended Sept. 30 -- delayed by the accounting review -- Omega posted net income of $14.6 million, or 20 cents a share, compared with a restated $5.7 million, or 6 cents a share, in the year-earlier period. Revenue was $35.2 million, up from $27.1 million.

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