Advocat suspends payments on 31 Omega Healthcare facilities

By Meredith Bonner, ALBR Editor

Advocat (Franklin, TN) has suspended rent or interest payments on at least 31 facilities owned by real estate investment trust Omega Healthcare Investors (Ann Arbor, MI).

The company says decreasing payments from Medicare and an expanding list of fines and bad debts are taking their toll on the company, attributing heavily to the missed payments. Advocat failed to meet payments on Omega-owned nursing homes and assisted living facilities in Alabama, Arkansas, Florida, Kentucky, and Tennessee, Omega says. Rents and interest payable by Advocat to Omega amount to about $12.7 million per year.

Omega says it is negotiating with Advocat about a possible restructuring of its agreements.

Analysts say Advocat’s missed payments go along with how the industry has been performing.

"It’s really not a surprise," analyst James Baker, managing director for SunTrust Equitable Securities, tells the Tennessean (Nashville). "Long term care is definitely in troubled times. Advocat has had some difficulties for some time. Plenty of other companies like them are in the same boat."

Advocat restated its 3Q99 earnings in December, but has not filed its 4Q99 and FY99 ended Dec. 31 financial statements, as required by its security agreements with Omega. In 3Q99, Advocats net revenues were $44.5 million, compared to $51.3 million in 3Q98. The decline was due mainly to lower Medicare reimbursements, Advocat says.

In early March, Advocat CEO Charles Birkett said the company had entered into agreements with three separate groups to develop assisted living facilities to be added to its Canadian operations. All three facilities are scheduled to open in 15 to 18 months.

Moody’s Investor Service (New York) and Standard & Poor’s (S&P’s; New York) have both lowered Omega’s credit ratings, citing the fact that Advocat, along with other operators, have stopped making rent and interest payments to the REIT. Moody’s lowered Omega’s senior unsecured debt rating to B3 from B1. The outlook for Omega’s ratings remains negative, Moody’s says, reflecting continuing stresses on Omega’s financial flexibility and on healthcare real estate.

S&P's says it lowered its corporate credit rating on Omega to double-B-minus from double-B-plus. In addition, ratings were lowered on the company's senior unsecured notes and cumulative preferred stock, S&P’s says. All ratings have been placed on CreditWatch with negative implications, says S&P’s.

Omega says Integrated Health Services (IHS; Sparks, MD) also has ceased paying interest on $55 million in mortgages owed to Omega. Interest payable by IHS amounts to about $5.5 million annually, the company says.