Fitch Rates Omega Healthcare's $700MM 4.5% Senior Unsecured Notes 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'BBB-' rating to the $700 million 4.5% senior unsecured notes due 2027 issued by Omega Healthcare Investors, Inc. OHI 'Omega'). The notes were priced at 98.456% of par for a yield to maturity of 4.659%. Omega intends to use the net proceeds for general corporate purposes, which may include the repayment of Aviv REIT, Inc. AVIV indebtedness in connection with their previously announced merger, the repayment of future maturities and/or future acquisitions. A full list of Fitch's ratings for Omega follows at the end of the release.

KEY RATING DRIVERS

OHI's ratings reflect that its announced merger with AVIV (the transaction) will have a negligible effect on leverage and fixed-charge coverage and will provide incremental improvement to the combined company's portfolio diversification and quality. Moreover, OHI's essentially undrawn $1 billion revolving credit facility and lack of debt maturities until 2019 afforded the company flexibility as to how and when it refinances AVIV's debt. The senior note issuance could fund the majority of the refinancing of AVIV's debt assuming closing of the transaction.

Of interest to Fitch will be the transaction's effect on OHI's equity valuation given management's track record of using common stock issuances to fund acquisitions on a leverage-neutral basis. Fitch estimates the transaction values AVIV at a 6.5% property net operating income (NOI) yield as compared to OHI's past acquisitions which ranged from 8% - 10%.

KEY METRICS REMAIN APPROPRIATE FOR THE RATING

OHI has consistently maintained quarterly leverage between 4.2x and 5.1x since 2011 and was 4.9x at Dec. 31, 2014 (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 the AVIV merger will have a negligible effect on combined company's leverage.

Fitch forecasts that leverage will remain between 4x - 5x over the next 12-to-24 months. Fitch defines leverage as debt net of readily available cash divided by recurring operating EBITDA.

Fixed-charge coverage is strong for the rating at 3.6x for the year ended Dec. 31, 2014, compared with 3x and 3.5x for 2012 and 2013, respectively. Fitch expects OHI's fixed-charge coverage will continue to improve driven by contractual rental escalators and reduced fixed charges as OHI refinances AVIV's senior unsecured notes and OHI's 2022 6.75% notes become callable. AVIV's senior unsecured notes have a weighted average coupon of 7.1% as compared to OHI's most recent issuance at 4.5%. Fitch defines fixed-charge coverage as recurring operating EBITDA less straight-line rents divided by total interest incurred.

CORPORATE LIQUIDITY PROVIDES FUNDING FLEXIBILITY

Fitch expects OHI will repay AVIV's secured and bank facility debt when the merger closes in part via proceeds from the offering. In addition, OHI may consider using its revolving credit facility as a bridge before permanently refinancing AVIV's high-cost senior unsecured debt.

DEBT-MATURITY STAGGERING SHOULD BENEFIT REFINANCING

The transaction reduces the largest percentage of OHI's debt due in any one year, which is a credit positive. Fitch has previously highlighted OHI's concentrated (albeit long-dated) debt maturities as a key concern. Longer-term, Fitch expects OHI will seek to lengthen and stagger its debt maturities as it refinances AVIV's debt and its 2022 notes become callable.

MARGINALLY STRONGER PORTFOLIO QUALITY

The transaction reduces OHI's reimbursement exposure and tenant concentration and has no effect on operator coverage, all credit positives. Concentration of OHI's three largest tenant operators will decline to 22% from 29%, while the 10 largest will decline to 52% from 69%.

However, the magnitude of the benefit from reduced concentration is limited by the commonality of tenant revenue sources, in Fitch's view. Operator coverage will be unaffected at 1.8x and 1.4x for EBITDARM and EBITDAR, respectively, and Fitch estimates OHI's tenants will reduce their reliance on federal and state reimbursements to 88% from 92%. The outsized financial volatility for OHI's operator tenants during periods when reimbursement rates have changed is the largest constraint on OHI's ratings. 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.

OHI and AVIV sourced much of their acquisitions from their operators, thus the expanded relationships (33 new operators) should increase OHI's pipeline of opportunities.

FAIR CONTINGENT LIQUIDITY UNAFFECTED

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% at Dec. 31, 2014. The transaction and subsequent equity offering may improve this metric.

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.

Fitch rates OHI as follows:

--IDR 'BBB-';

--Unsecured revolving credit facility 'BBB-';

--Senior unsecured notes 'BBB-';

--Senior unsecured term loan 'BBB-';

--Subordinated debt 'BB+'.

STABLE OUTLOOK

The Stable Outlook reflects Fitch's expectation that metrics will remain appropriate for the rating and OHI will lengthen and stagger its forward debt maturities over the next 12-to-24 months. Additionally, Fitch expects that any reimbursement pressures at the operator level would have a minimal impact on OHI cash flows given lease length, covenants and coverage.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--SSNOI growth of 2.5% through 2016;

--The AVIV merger closes in 1H15 and is leverage neutral;

--Net acquisitions in addition to the AVIV merger of $500 million at a 9% cap rate, annually;

--Equity issuances via the at-the-market program to partially fund net investment activity;

--The refinancing of higher coupon senior unsecured notes once callable.

RATING SENSITIVITIES

Fitch does not expect management to operate the company consistent with those metrics 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 4x (leverage was 4.9x at Dec. 31, 2014);

--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (coverage was 3.6x for 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:

--'Omega Healthcare Investors, Inc. - Ratings Navigator' (Feb. 26, 2015);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 18, 2014);

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Omega Healthcare Investors, Inc. - Ratings Navigator
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862071

Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981338

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