--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
Leverage is also strong for the 'BBB-' rating. Leverage was 5.0x and 4.5x for the TTM and quarter ended
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
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
As expected by Fitch, OHI's operators' rent coverage has weakened due to the
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
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
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (coverage was 3.6x for the TTM and quarter ended
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'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage'
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors'
--'Recovery Ratings and Notching Criteria for Equity REITs'
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
Source: Fitch Ratings
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