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TMCNet:  Fitch Rates OHI's $200MM Term Loan due 2016 'BBB-'; Outlook Stable

[January 07, 2014]

Fitch Rates OHI's $200MM Term Loan due 2016 'BBB-'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings assigns a credit rating of 'BBB-' to the $200 million senior unsecured delayed draw term loan due 2016 issued by Omega Healthcare Investors, Inc. (NYSE: OHI).

While OHI has not yet drawn on the facility, Fitch expects proceeds will be used, in part, to repay amounts outstanding on the revolving credit facility stemming from the closing of the $525 million sale/leaseback transaction in November 2013. Future borrowings may also be used for general corporate purposes including the repayment of existing indebtedness, asset acquisitions, acquiring or improving facilities, capital expenditures or other corporate purposes.

Fitch currently rates OHI as follows:

--IDR 'BBB-';

--Unsecured revolving credit facility 'BBB-';

--Senior unsecured notes 'BBB-';

--Senior unsecured term loans 'BBB-';

--Subordinated debt '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 Sept. 30, 2013 pro-forma for the sale/leaseback, term loan agreement and underwritten equity issuance (pro forma), OHI's fixed-charge coverage ratio was 3.6x, compared with 3.0x for the years 2012 and 2011, respectively. Contractual rental escalators drive Fitch's expectation of fixed-charge coverage remaining above 3.5x through 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 4.7x at Sept. 30, 2013 pro-forma, as compared with 5.6x and 5.7x as of Dec. 31, 2012 and 2011, respectively. 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 THROUGH 2015 DUE TO DEBT MATURITY SCHEDULE

OHI's near-term liquidity is exceptionally strong with no debt maturities until 2016. Thereafter, OHI's debt maturities are concentrated with approximately 27% maturing in 2016 and 2017, combined pro forma. The 2016 and 2017 maturities are the balances on the revolving credit facility and term loans thus providing OHI the ability to prepay ahead of the stated maturities with amounts raised via future debt and equity offerings. Fitch assumes OHI will seek to lengthen duration and reduce the concentration of its debt maturities by issuing longer dated senior unsecured obligations later in 2014.

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. Approximately 92% of OHI's operator revenues are derived from public sources as of June 30, 2013. Operators have experienced greater fnancial 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 1.9x and 1.5x, respectively, for EBITDARM and EBITDAR for the trailing twelve months ended June 30, 2013. 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 1.7x and 2.1x 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 adjusted funds from operations payout ratios (AFFO) were 75.1% and 69.9% for the quarter and TTM-ended Sept. 30, 2013 as compared to 80.3% for 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 4.7x as of Sept. 30, 2013 pro-forma);

--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (coverage was 3.6x for the 12 months ended Sept. 30, 2013 pro-forma).

The following factors may have a negative impact on OHI's 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:

--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 19, 2013;

--'Corporate Rating Methodology,' Aug. 5, 2013;

--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 26, 2013.

Applicable Criteria and Related Research:

Recovery Rating and Notching Criteria for Equity REITs - Effective May 12, 2011 to May 3, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813542

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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