Fitch Rates Omega Healthcare Investors, Inc.'s Unsecured Term Loan 'BBB-';
NEW YORK -- December 12, 2012
Fitch Ratings has assigned a 'BBB-' rating to the $200 million unsecured term
loan due 2017 entered into by Omega Healthcare Investors, Inc. (NYSE: OHI;
Omega). The loan bears interest at a rate based on the company's credit
ratings and is currently priced at LIBOR + 175 basis points. At closing, the
company had $100 million in borrowings under the term loan facility with up to
120 days to borrow the full amount available. Proceeds will be used to repay
amounts outstanding on the line of credit facility and for future
acquisitions. The term loan was entered into in conjunction with a new credit
facility. The term loan and line of credit facility are subject to the same
covenants as the previous credit facility.
Fitch currently rates Omega as follows:
--Issuer Default Rating (IDR) 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Senior unsecured notes 'BBB-';
--Subordinated debt 'BB+'.
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 ($2.8 billion in assets), moderate geographic
concentration (Florida and Ohio collectively comprise 32% of total
investments) and exposure to smaller, un-rated operators.
Fixed-charge coverage is strong for the 'BBB-' rating. For the trailing 12
months (TTM) ended Sept. 30, 2012, OHI's fixed-charge coverage ratio was 3.1x,
compared with 3.1x and 2.7x in full-year 2011 and 2010, respectively.
Contractual rental escalators drive Fitch's expectation of fixed-charge
coverage improving to 3.4x by 2014. Fitch defines fixed-charge coverage as
recurring operating EBITDA less straight-line rents divided by total interest
incurred and preferred dividends.
Leverage is also strong for the 'BBB-' rating and continues to decline.
Leverage was 5.1x as of Sept. 30, 2012, as compared with 5.7x and 5.1x,
respectively, as of Dec. 31, 2011 and 2010. Fitch forecasts that leverage will
migrate to the mid-4.0x range through 2014 as the company acquires additional
facilities funded evenly through debt and equity. Fitch calculates leverage as
net debt-to-recurring operating EBITDA.
OHI's liquidity is exceptionally strong with no debt maturities before 2017
other than amounts outstanding on the unsecured revolving line of credit in
2016. The next maturity is the aforementioned $200 million term loan 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
Offsetting the credit positives is OHI's focus on skilled-nursing facilities
and assisted-living facilities, which are highly reliant upon federal and
state reimbursement. More than 92% of OHI's operator revenues are derived from
public sources as of June 30, 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, 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 1.6x, respectively, for EBITDARM and
EBITDAR as of June 30, 2012. These levels compare to 2.2x and 1.8x,
respectively as of Dec. 31, 2011. Master leases with cross-collateralization
and EBITDAR coverage covenants improve OHI's security but OHI remains at risk
for potential tenant defaults or requests for rental relief concessions.
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 modestly below current levels.
Contingent liquidity as measured by unencumbered assets-to-unsecured debt is
adequate, ranging between 1.6x and 2.2x at capitalization rates of 9.0% to
12.0%. This ratio will likely remain flat as the company acquires properties
on a leverage-neutral basis.
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.
The following factors could result in positive momentum in the ratings and/or
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining
below 4.0x (leverage was 5.1x as of Sept. 30, 2012);
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (coverage
was 3.1x for the 12 months ended Sept. 30, 2012).
Conversely, the following factors may result in negative momentum in 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'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012;
--'Corporate Rating Methodology,' Aug. 8, 2012;
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 27, 2012.
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Equity REITs
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