|[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:
--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
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.
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.
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:
--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
--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,
--'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
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August
Criteria for Rating U.S. Equity REITs and REOCs
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