Fitch Upgrades Omega Healthcare Investors Pfd Stock; Affirms Sr Debt

Business Wire, Sept 3, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 3, 2002

Fitch Ratings has affirmed the 'B-' rating for Omega Healthcare Investors, Inc.'s (Omega) outstanding $100 million 6.95% senior unsecured notes due Aug. 1, 2007 and removed it from Rating Watch Negative. The Rating Outlook is Negative. Fitch has also upgraded the preferred stock rating to 'C' from 'D' on Omega's outstanding $57.5 million series A 9.25% cumulative preferred stock, $50 million series B 8.625% cumulative preferred stock and $105 million series C 10% cumulative preferred stock.

The affirmation and removal of the Rating Watch Negative follows the repayment of the $100 million June 15, 2002 6.95% senior debt obligation and reflects positively on Omega's improving liquidity. However, the Negative Outlook reflects Fitch's concern over the quality of the unencumbered asset base, which is not fully stabilized. While Omega benefits from a portfolio of geographically diverse skilled nursing facilities, no development risk, a clear business strategy, a markedly improved liquidity profile, and a manageable use of debt leverage at 36% debt to undepreciated book capital, from 43% year over year, the unsecured debt rating is hinged principally upon Omega's unencumbered skilled nursing assets, which, by definition, have no prior claims on them. These free and clear assets, while potentially representing reasonable recovery protection in a liquidation scenario, do not currently cover their contractual rents.

Positively, Fitch notes that, despite being recently hampered by bankruptcy defaults by many of its tenant operators and liquidity issues from a short debt maturity schedule, Omega has generated sufficient liquidity to make timely repayments on its June 15, 2002 $100 million 6.95% senior debt obligations through asset sales, dividend suspension, and cash flow retention, which has prompted Fitch to remove the Rating Watch Negative status. Fitch also notes that with the majority of skilled nursing providers in a post-bankruptcy phase, better-stabilized operations industry wide, and more favorable Medicare and Medicaid reimbursements, the skilled nursing industry is poised to produce stronger operating results. The fact that the majority of Omega's tenant leases have been reaffirmed or repriced is also a credit positive, since more stable revenues have been achieved. Nevertheless, Omega is still working through some tenant and balance sheet difficulties and Fitch's Negative Outlook on the senior debt issues until the unencumbered pool of assets stabilize.

Improvement in the unencumbered asset base from their current occupancy levels to a stabilized industry average in the low to mid-80% range, which would allow these assets to provide sufficient coverage to meet their rent obligations independently and without subsidies from the other assets in the master lease pools that have prior claims on them, will be material factors in future outlook and rating considerations. While the stabilization of these assets may take some time, Fitch recognizes that the new management team has been committed to repaying its debt obligations, and has the industry experience and commitment to stabilize operations and accretively expand Omega's skilled nursing portfolio on a stand alone basis.

The 'C' preferred rating, which has been upgraded from 'D', reflects clarification of Fitch policy regarding the treatment of ratings of securities where companies have elected to utilize deferral features provided in the instrument. In this case, it is the single 'C' rating of a cumulative preferred issue that is being accrued by an entity due to suspended dividends, but has not filed for bankruptcy protection. Fitch believes that there is an increased likelihood that Omega will begin to pay down the approximate $35 million of accrued preferred dividends as of Aug. 15, 2002, that have been generated by the $57.5 million series A cumulative preferred stock, the $50 million series B cumulative preferred stock, and the $105 million 10% convertible series C preferred stock since dividends were suspended in February 2001. Fitch expects that Omega's continued operations will provide sufficient cash flow to begin its necessary cumulative dividend repayments within the next several quarters, which Omega will soon h ave to resume in order to maintain its real estate investment trust (REIT) status. Omega's operations have recently returned to profitability and its forward losses are gradually diminishing. Prior to the commencement of a common dividend, all cumulative preferred dividends need to be paid out first. Should Omega begin to repay its unpaid cumulative dividends, the preferred rating would likely move to 'CC,' absent more substantial improvements in Omega's operation performance and funding profile.

Omega Healthcare Investors, Inc. is an $832 million (total market capitalization) equity health care REIT investing in and providing financing to the long-term care industry. At June 30, 2002, Omega owned or held mortgages on 233 skilled nursing and assisted living facilities with approximately 24,400 beds located in 28 states and operated by 36 independent healthcare operating companies.