Fitch Affirms Omega Healthcare's IDR at 'BBB-'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the credit ratings of Omega Healthcare Investors, Inc. (NYSE: OHI, or Omega) as follows:
--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. Of secondary concern is the debt maturity schedule which, while long-dated, is concentrated in 2022 and 2024. OHI can reduce the maturity risk by calling certain notes in whole or in part ahead of the stated maturities and/or by growing the portfolio further.
STRONG CREDIT METRICS
Fixed-charge coverage is strong for the 'BBB-' rating at 3.6x for the trailing 12 months (TTM) and quarter ended March 31, 2014, 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 and approaching 4.0x through the end of 2016. 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. Leverage was 5.0x and 4.5x for the TTM and quarter ended March 31, 2014, which reflects the timing of the Ark Holdings transaction, as compared with 5.6x and 5.7x as of Dec. 31, 2012 and 2011, respectively.
Fitch forecasts that leverage will remain in the mid-4.0x-5.0x range through 2015 as the company acquires additional facilities funded evenly through debt and equity, and as contractual rental escalators increase same-store EBITDA. Fitch calculates leverage as net debt-to-recurring operating EBITDA.
STRONG LIQUIDITY BUT CONCENTRATED DEBT MATURITIES
OHI's lack of near-term debt maturities and capital expenditures, coupled with full availability under the recently refinanced and expanded $1 billion revolving credit facility provides OHI with significant liquidity. OHI's nearest debt maturity will be the $200 million term loan due 2019. Fitch notes OHI's debt maturities are long-dated but concentrated with 27.5% and 38.2% maturing in 2022 and 2024, respectively. However, the 2022 notes and $400 million of the 2024 notes may be called by the company beginning in 2015 and 2017, respectively, and Fitch expects OHI will seek to refinance each note with proceeds from longer-dated senior unsecured note issuances provided the market pricing at that time offsets the incurrence of the call premium.
COMMONALITY OF TENANT REVENUE SOURCES MITIGATES OPERATOR DIVERSIFICATION BENEFITS
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 Dec. 31, 2013. 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' rent 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 1.4x for EBITDARM and EBITDAR, respectively for the TTM ended Dec. 31, 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
The majority of OHI's assets are unencumbered and Fitch estimates unencumbered asset coverage of unsecured debt ranges from 1.6x to 2.1x based on a stressed capitalization range of 9%-12%. The mid-point of the coverage is down from previous years though Fitch notes this is driven in part by the timing of acquisitions and Fitch anticipates OHI's normalized unencumbered asset coverage ratio should remain around 2.0x.
Despite eight quarters of dividend increases, OHI has continued to reduce its adjusted funds from operations (AFFO) payout ratio to 71% for 1Q'14 from the low 90% range in 2007-2009. As a result, OHI is able to retain approximately $50 million-$100 million of cash flow from operations to fund acquisitions and debt repayment, which Fitch views favorably. OHI targets an AFFO payout ratio of less than 85% (currently at 69% based on the company's calculations), thus Fitch expects OHI will continue to increase the dividend in subsequent quarters.
SUBORDINATED DEBT NOTCHING
The one-notch differential between OHI's IDR and the subordinated debt assumed as part of the CapitalSource transaction considers the relative subordination within OHI's capital structure. The interest is due and payable only to the extent that there is rent being received from the tenants of the acquired properties to cover the interest expense related to the debt, and the principal is due only to the extent that all rent has been paid for the term of the debt.
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.
Fitch does not expect management to operate the company consistent with these factors that could otherwise result in positive momentum in OHI's ratings and/or Outlook:
--Increased scale and diversification;
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 4.0x (leverage was 5.0x and 4.5x for TTM and quarter ended March 31, 2014);
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (coverage was 3.6x for the TTM and quarter ended March 31, 2014).
The following factors may result in negative momentum in 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:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' May 28, 2014;
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' Feb. 26, 2014;
--'Recovery Ratings and Notching Criteria for Equity REITs' Nov. 19, 2013.
Applicable Criteria and Related Research:
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Equity REITs