Fitch Ratings has affirmed the credit ratings of Omega Healthcare
Investors, Inc. (NYSE: OHI; Omega) as follows:
Omega Healthcare Investors, Inc.
--Issuer Default Rating (IDR) at 'BBB-';
--Unsecured revolving credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Senior unsecured term loan at 'BBB-';
--Subordinated debt at 'BB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect the strength of the company's metrics (low leverage,
high fixed-charge coverage, stable cash flows and exceptional liquidity
due to no near-term maturities), which offset the largest credit concern
- the focus on skilled nursing and assisted living facilities. The high
percentage of government reimbursement and the corresponding regulatory
risk to operators of these facilities may place pressure on operator
earnings. Additionally, Fitch notes the company's small size ($3 billion
in assets), moderate geographic concentration (Florida and Ohio
collectively comprise 29% of 2013 rental income) and exposure to
smaller, unrated operators.
STRONG CREDIT METRICS
Fixed-charge coverage is strong for the 'BBB-' rating. For the trailing
12 months (TTM) ended March 31, 2013, OHI's fixed-charge coverage ratio
was 3.1x, compared with 3.0x for 2012 and 2011, respectively.
Contractual rental escalators drive Fitch's expectation of fixed-charge
coverage surpassing 3.5x by the end of 2015. Fitch defines fixed-charge
coverage as recurring operating EBITDA less straight-line rents divided
by total interest incurred.
Leverage is also strong for the 'BBB-' rating and continues to decline.
Leverage was 4.5x at March 31, 2013, as compared with 5.6x and 5.7x,
respectively, as of Dec. 31, 2012 and 2011. Fitch forecasts that
leverage will migrate to the low-to-mid 4.0x range through 2015 as the
company acquires additional facilities funded evenly through debt and
equity and contractual rental escalators increase same-store EBITDA.
Fitch calculates leverage as net debt-to-recurring operating EBITDA.
STRONG LIQUIDITY DUE TO DEBT MATURITY SCHEDULE
OHI's liquidity is exceptionally strong with no debt maturities before
2017 other than amounts that could be drawn on the unsecured revolving
line of credit in 2016 and modest amounts of principal amortization. The
next maturity is a $200 million term loan issued in December 2012 and
due in 2017. OHI's back-ended debt maturities, coupled with the lack of
recurring capital expenditures (due to the triple-net nature of the
leases) provide exceptional liquidity coverage.
RISKS STEMMING FROM SNF FOCUS
Offsetting the credit positives is OHI's focus on skilled-nursing
facilities (SNF) and assisted-living facilities, which are highly
reliant upon federal and state reimbursement. More than 91% of OHI's
operator revenues are derived from public sources as of Dec. 31, 2012.
Operators have experienced greater financial volatility and stress when
rates and/or reimbursement formulas have changed. Healthcare
legislation, together with budgetary concerns at both the federal and
state levels will likely continue to pressure operator margins and
operators' capacity to honor lease obligations.
As expected by Fitch, OHI's operators' coverage has weakened due to the
Centers for Medicare & Medicaid Services 2011 reimbursement rate
adjustment but remains solid (though not robust) at 2.0x and 1.5x,
respectively, for EBITDARM and EBITDAR for the year ended Dec. 31, 2012.
These levels compare to 2.2x and 1.8x, respectively for the year ended
Dec. 31, 2011. Master leases with cross-collateralization and EBITDAR
coverage covenants improve OHI's security; however, OHI remains at risk
for potential tenant defaults and/or requests for rental relief
concessions stemming from changes to reimbursement rates.
OHI's operators have been offsetting revenue declines through non-rent
operating expense cost savings. Coverage metrics have declined
moderately but Fitch expects they will stabilize near current levels.
FAIR CONTINGENT LIQUIDITY
Contingent liquidity as measured by unencumbered assets-to-unsecured
debt is adequate, ranging between 1.9x and 2.2x at capitalization rates
of 10% to 12%. This ratio will likely remain flat as the company
acquires properties on a leverage-neutral basis.
Omega's dividend distribution policies allow it to retain some cash flow
from operations for corporate uses. OHI's Fitch-calculated adjusted
funds from operations payout ratios (AFFO) were 71.4% and 80.3% for the
quarter-ended March 31, 2013 and year-ended Dec. 31, 2012.
SUBORDINATED DEBT NOTCHING
The one-notch differential between Omega's IDR and the subordinated debt
assumed as part of the CapitalSource transaction considers the relative
subordination within OHI's capital structure.
STABLE OUTLOOK
The Stable Outlook reflects Fitch's expectation that metrics will
improve but remain appropriate for the current rating and that any
reimbursement pressures at the operator level will have a minimal impact
on OHI cash flows given lease length, covenants and coverage.
RATING SENSITIVITIES
Although Fitch does not expect positive ratings momentum in the
near-to-medium term, the following factors could result in positive
momentum in the ratings and/or Outlook:
--Increased scale;
--Fitch's expectation of net debt-to-recurring operating EBITDA
sustaining below 4.0x (leverage was 4.5x as of March 31, 2013);
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x
(coverage was 3.1x for the 12 months ended March 31, 2013).
Conversely, the following factors may have a negative impact on the
ratings and/or Outlook:
--Further pressure on operators through reimbursement cuts;
--Fitch's expectation of leverage sustaining above 5.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 2.5x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 12,
2012);
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795903
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