OMEGA HEALTHCARE INVESTORS, INC.
Fitch Ratings has affirmed
The Rating Outlook has been revised to Stable from Negative. Fitch believes Omega's leverage will remain within its sensitivities over the next 24 months, due in part to Omega's proactive capital allocation, including asset dispositions and issuance of common stock for
Key Rating Drivers
Ongoing Lease Restructuring: Rental payments by OHI's tenants had been solid through the pandemic despite the significant declines in occupancies and elevated operating expenses. However, the recovery in their operating fundamentals and cashflows was not sufficient to meet rent obligations as government fiscal support began to be exhausted in 2022, leading to multiple announced non-payments and restructurings.
Omega has been in the process of restructuring many of these agreements or releasing locations, and has sold assets and renegotiated lower rents for certain tenants. During the nine months ended
Operators' Fundamentals Recovering, Albeit Slowly: Operator profitability has begun to slowly recover from lows, but remains weak compared to pre-pandemic levels. This modest recovery is due to observable organic trends and other efforts, such as the movement away from non-agency labor. However, overall workforces remain meaningfully reduced, even in cases where direct impacts from the pandemic have abated. Many operators have essentially imposed their own admissions bans due to staffing shortages, which has continued to constrain occupancy and overall operations.
Lease coverage ratios for skilled nursing portfolios have been a persistent concern for skilled nursing facility (SNF) operators even pre-pandemic. Lease coverage ratios of 1.2x or lower represent a level Fitch views most at-risk if the current SNF recovery stalls. Pre-pandemic, lease coverage ratios were pressured by changes in Medicare and Medicaid reimbursement rates, growth in labor costs, shift of care to lower cost settings, and fixed rent escalators.
Investment-Grade Financial Metrics: After OHI's equity issuance and asset dispositions in 2023, Fitch now expects REIT leverage to remain below 5.5x over the ratings horizon. The affirmation and Stable Rating Outlook reflects OHI's willingness and ability to make capital allocation decisions in order to stabilize and reduce leverage within its target range. The affirmation further reflects OHI's solid track record of compliance with its financial policy even through the majority of the pandemic. For now, the company has been able to maintain metrics in line with its 'BBB-' rating and has displayed an ability to sell assets, issue equity, and increase commitments under its revolving credit facility, while maintaining its existing dividend.
Long-Run SNF Rental Income Risk Profile Generally Intact: Fitch views the long-term rental income risk profile of OHI's skilled nursing portfolio to be relatively unchanged by the pandemic. Fitch believes SNFs will retain their place in the
Derivation Summary
OHI's 'BBB-' ratings reflect how the issuer's portfolio of skilled nursing and senior housing real estate has historically generated durable rental cashflows. In addition, the issuer has maintained below-average leverage to offset elevated tenant credit risk. The ratings also reflect the issuer's solid access to the debt and equity capital markets. The Stable Outlook reflects Fitch's belief that Omega's actions, including equity issuance and lease restructuring, are sufficient to maintain leverage within Fitch's sensitivities in the intermediate term.
OHI is rated in line with
Country Ceiling, parent/subsidiary linkage and operating environment aspects do not impact the rating.
Key Assumptions
Operators with weak coverage but which have not had their leases restructured do not require meaningful additional restructuring and can recover organically through occupancy and rate increases.
For assets where re-tenanting is underway or required, re-tenanting is successful within one year, though potentially at lower rental rates.
Beyond what has already been called out by the company, rental income for operators who have had their agreements restructured is paid without issue in 2024 and beyond.
The company does not perform any acquisitions and divestitures beyond what has already been completed or from assets held for sale. Fitch assumes any additional acquisitions would be leverage neutral or at minimum the company would manage its leverage below 5.5x.
The company does not raise or repurchase any equity beyond what has already been completed.
Given the net divestitures and equity raises in 2023, leverage remains comfortably below 5.5x over the ratings horizon.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of REIT leverage sustaining below 4.0x;
Fitch's expectation of REIT fixed charge coverage sustaining above 3.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of REIT leverage sustaining above 5.5x without a timely restoration;
Fitch's expectation of REIT fixed charge coverage sustaining below 2.5x;
Further pressure on operators through potential revisions to legislation that results in lower coverage or other changes in the regulatory framework.
Liquidity and Debt Structure
Strong Liquidity Profile, Well Staggered Debt Maturities: Fitch estimates OHI's sources of liquidity (unrestricted cash, availability under the revolving credit facilities, as well as retained cash flow from operations) cover its uses (debt maturities, committed development expenditures and maintenance capex) by 1.7x through 2025. The issuer had roughly
Weak Contingent Liquidity: Fitch estimates that OHI's unencumbered assets would cover net unsecured debt (UA/UD) by roughly 1.6x assuming a 10.5% stressed cap rate as of
The financeability of the underlying real estate is a core tenet of investment-grade REIT ratings. Skilled nursing and senior housing facilities generally benefit from strong access to contingent liquidity sources, including a multitude of durable government sponsored mortgage capital sources and more pro-cyclical bank mortgage and CMBS market.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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