OREANDA-NEWS. Fitch Ratings has assigned a 'BBB-' rating to the $250 million senior unsecured term loan facility due 2022 issued by Omega Healthcare Investors, Inc. (NYSE: OHI 'Omega'). Omega entered into swap agreements to fix the interest rate to 3.8% based on the current ratings. Omega intends to use the net proceeds to refinance existing indebtedness, finance acquisitions, funding working capital and capital expenditures or for general corporate purposes. A full list of Fitch's ratings for Omega follows at the end of this release.

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, and hence their ability to make current rental payments to OHI.

KEY METRICS REMAIN APPROPRIATE FOR THE RATING

OHI has consistently maintained quarterly leverage between 3.9x and 5.1x since 2011; leverage was 4.8x at Sept. 30, 2015 pro forma for the $575 million note redemption. 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 defines leverage as debt net of readily available cash divided by recurring operating EBITDA.

Fixed-charge coverage is strong for the rating at 3.9x for the trailing twelve months (TTM) ended Sept. 30, 2015, compared with 3.6x and 3.5x for 2014 and 2013, respectively. Fitch expects OHI's fixed-charge coverage will continue to improve, driven by contractual rental escalators and reduced fixed charges as the interest savings from the refinancing is realized. Fitch defines fixed-charge coverage as recurring operating EBITDA less straight-line rents divided by total interest incurred.

STRONG LIQUIDITY; DEBT MATURITY STAGGERING UNDERWAY

OHI's near-term liquidity is exceptionally strong with no debt maturities until 2017. Moreover, the $300 million term loan maturity in 2017 can be extended to 2019 at OHI's option pushing its window of no debt maturities out to 2019 with $900 million of availability under its revolving credit facility. Fitch expects OHI will consider staggering its debt maturities and extending terms by exercising the call option on the $400 million of 2024 senior notes beginning in 2017 and issuing longer dated senior unsecured obligations depending on the interest rate environment.

OHI's liquidity sources include its $1.25 billion revolving credit facility due 2019, upwards of $120 million - $150 million per year of retained free cash flow (funds available for distribution [FAD] less dividends) assuming a 70% - 75% payout ratio, and $15 million of cash at Sept. 30, 2015. OHI's dividends comprised 72% and 74% of FAD in 2014 and YTD.

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 thus partially mitigating the benefits of tenant and geographic diversification.

Another limiting factor on the rating (but inherent in the strategy) is OHI's exposure to private, unrated operators which limits the extent to which Fitch can assess their creditworthiness. Rent coverage, as measured by earnings before interest, tax, depreciation and amortization, rent and management fees of 1.8x at June 30, 2015 is comparable to peers, consistent with past periods and implies some cushion to sustain annual rental increases and/or unforeseen changes to reimbursement rates.

FAIR CONTINGENT LIQUIDITY UNAFFECTED

The majority of OHI's assets are unencumbered. Fitch estimates unencumbered asset coverage of unsecured debt ranges from 1.8x to 2.5x based on 2Q15 unencumbered NOI at a stressed capitalization range of 9% - 12%.

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.

KEY ASSUMPTIONS

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

--SSNOI growth of 2.5% through 2016;
--Net acquisitions 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 4.8x pro forma Sept. 30, 2015);
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (coverage was 3.9x 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+'.