December 12, 2012 / 10:01 PM / 5 years ago

TEXT - Fitch rates Omega Healthcare Investors

Dec 12 - 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 
liquidity coverage. 

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 

--Increased scale;   

--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.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below