NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the senior unsecured notes due 2023 issued by Omega Healthcare Investors, Inc. (NYSE: OHI 'Omega'). A full list of Fitch's ratings follows at the end of this release.
KEY RATING DRIVERS
The 'BBB-' ratings are based on Omega's strong credit metrics (low leverage, high fixed-charge coverage [FCC] and ample liquidity) providing a sufficient buffer against the potential effects of tenant-related operating headwinds. OHI focuses on skilled nursing (SNFs) and assisted living facilities (ALFs) wherein tenants' capacity to honor lease obligations are closely influenced by changes to government reimbursement and regulatory/licensing risk. Operating headwinds faced by skilled nursing operators in general have been a focal point year-to-date after announcements related to performance at some of the industry's largest operators. Fitch does not believe these headwinds will materially affect OHI's credit initially, although they could cause the price at which OHI can issue debt and equity to become more expensive.
LOW LEVERAGE WITH SUFFICIENT CUSHION
OHI has consistently maintained leverage between 3.9x - 5.2x since 2011, with leverage at 5.2x and 5.4x for the quarter and year ended March 31, 2016. Fitch views quarterly leverage as more meaningful than trailing 12 months for OHI given the lack of seasonality in reported earnings and timing effects of acquisitions. Fitch expects leverage will remain between 4x - 5x over the next 12-to-24 months.
Fitch's projections indicate OHI has a cushion of 0.5x - 1x to the negative leverage sensitivity of 5.5x. Fitch views it as unlikely that tenant issues could in and of themselves cause OHI to breach the 5.5x sensitivity. Under a simple analysis where the rent is reduced for tenants with coverage below 1x (7.6% of 4Q15) back to 1.4x (as measured by EBITDAR) leverage only increases to 0.2x. Should OHI change its financial policies and operate with leverage closer to 5.5x, Fitch would then consider the adequacy of the cushion. Fitch defines leverage as debt net of readily available cash divided by recurring operating EBITDA.
FCC is strong for the rating at 4.5x for the trailing twelve months ended March 31, 2016, compared to 3.7x and 3.6x for 2014 and 2013, respectively. Fitch expects OHI's FCC will continue to improve, driven by contractual rental escalators and reduced fixed charges as the interest savings from the refinancing is realized. Fitch defines FCC as recurring operating EBITDA less straight-line rents divided by total interest incurred.
STRONG LIQUIDITY & APPROPRIATE CONTINGENT LIQUIDITY
OHI's near-term liquidity is exceptionally strong with no debt maturities until 2017, especially when considering these maturities can be extended at OHI's option to 2019. OHI's sources of liquidity are comprised of capacity under the $1.25 billion revolving credit facility due 2018, proceeds from the 2023 notes offering and retained cash flow from operations.
Other measures of OHI's liquidity and contingent liquidity are also appropriate for the 'BBB-' rating. OHI's unencumbered assets cover net unsecured debt by 1.5x - 2.1x assuming stressed capitalization rates of 9% - 12%.
COMMONALITY OF TENANT REVENUE SOURCES MITIGATES OPERATOR DIVERSIFICATION BENEFITS
Fitch views skilled nursing real estate (and by extension pure-play REITs) as having more risk than other real estate subsectors due to the potential for legislative or regulatory changes (including the annual changes to reimbursement amounts by the Center for Medicare and Medicaid Services). These unilateral actions can impact the profitability of most tenants, partially mitigating the benefits of tenant and geographic diversification.
The start of 2016 has been eventful with some of the largest operators announcing weaker results. SNF margins are being pressured by increasing coverage under Medicare Advantage, Department of Justice investigations potentially influencing billing practices and pilot programs for bundled payments and coordinated care. Fitch views these as long-term headwinds that stronger operators should be able to manage given they are fairly well-telegraphed.
Another limiting factor on the rating (but inherent to the strategy) is OHI's exposure to private, unrated operators, which limits the extent to which Fitch can assess their creditworthiness. Fitch views most for-profit post-acute operators to be 'B' category credits, where capacity to meet debt obligations is vulnerable to deterioration in the business and economic environment. Rent coverage, as measured by EBITDARM (EBITDAR before management fees) and EBITDAR were 1.8x and 1.4x, respectively, at Dec. 31, 2015, which is comparable to peers, consistent with prior periods and implies some cushion to sustain annual rental increases and/or unforeseen changes to reimbursement rates.
Fitch's key assumptions within the rating case for OHI include:
--Operator headwinds persist and pressure coverage levels but do not result in wholesale bankruptcies or rent renegotiations;
--Contractual rental escalators of 2% - 2.5% per year through 2018;
--Acquisitions of $500 million per year through 2018 at 8.5% cap rates;
--$300 million of equity being issued in both 2017 and 2018 to fund acquisitions. Should OHI's equity trade at levels where it is unable or unwilling to transact, Fitch assumes OHI would reduce acquisition volumes.
Fitch does not expect management will operate the company consistent with the metrics that could otherwise result in positive momentum in OHI's ratings and/or Outlook, such as:
--Increased scale and diversification;
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 4x (leverage was 5.2x at March 31, 2016);
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (coverage was 4.6x for TTM).
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.
FULL LIST OF RATING ACTIONS
Fitch rates OHI as follows:
Omega Healthcare Investors, Inc.:
--Long-Term IDR 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Senior unsecured notes 'BBB-';
--Senior unsecured term loans 'BBB-';
--Subordinated debt 'BB+'.
Date of Relevant Rating Committee: March 18th, 2016
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)