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Rating Action:

Moody's revises Omega's outlook to positive and places Aviv on review for upgrade after merger announcement

31 Oct 2014

Approximately $2.5 billion of securities affected

New York, October 31, 2014 -- Moody's Investors Service has affirmed Omega Healthcare Investors, Inc.'s senior unsecured rating at Ba1 and revised the outlook to positive from stable following the announcement that it has agreed to merge with Aviv REIT, another healthcare REIT focused on investing in skilled nursing facilities (SNFs), in an all-stock transaction. Moody's simultaneously placed the ratings of Aviv Healthcare Properties Ltd. Partnership (senior unsecured debt at Ba3), a subsidiary of Aviv REIT, on review for upgrade. Aviv shareholders will receive 0.90 shares of OHI stock for each of their shares or units. The transaction is expected to close in first quarter 2015.

The following ratings were affirmed with a positive outlook:

Omega Healthcare Investors, Inc. -- senior unsecured debt at Ba1

The following ratings were placed on review for upgrade:

Aviv Healthcare Properties Ltd. Partnership -- senior unsecured debt at Ba3; senior unsecured shelf at (P)Ba3; corporate family rating at Ba3

Aviv Healthcare Capital Corporation -- senior unsecured shelf at (P)Ba3

RATINGS RATIONALE

Omega's positive outlook reflects the numerous benefits arising from its proposed combination with Aviv, including increased scale, enhanced tenant and geographic diversification, and an expanded pool of tenant relationships that will drive its continued growth. As the leading SNF-focused REIT, Omega will be even better positioned to finance sale-leaseback/mortgage transactions with operators looking to consolidate within the highly fragmented skilled nursing industry.

Moody's continues to note that Omega is increasing its asset base by 36% (based on gross book value) and there is minimal overlap between the two REITs' top tenants. Omega's top three tenants will decline to 22% from 29% of revenues and it is gaining 33 new operator relationships with whom it may grow.

Importantly, Omega will retain sound rent coverage across its portfolio post merger. Aviv's EBITDAR coverage (EBITDAR/rent), which measures its operators' ability to meet their rental payments, is consistent with Omega's portfolio at about 1.4x (TTM as of 2Q14).

Moody's notes that Omega is adhering to its long-standing commitment to conservative balance sheet management with this transaction. Net Debt/EBITDA is expected to remain below 5x post merger, with secured debt below 5% of gross assets, and fixed charge coverage greater than 3.5x -- all solid investment-grade credit metrics. Furthermore, Omega has the opportunity to refinance a significant amount of its debt and Aviv's debt over the next year, which will boost fixed charge coverage further. Omega had $997 million available on its credit facility as of 3Q14, providing it with substantial liquidity and flexibility

Omega's key credit challenge remains its property sub-type concentration in SNFs. The SNF sub-segment is highly regulated and reliant on government reimbursement through the Medicare and Medicaid programs, which are subject to potential rate volatility. The potential for sharp and sudden changes in operator cash flows arising from possible reimbursement cuts will continue to be a key factor considered in Omega's rating.

Aviv's review for upgrade reflects Moody's expectation that it will upgrade the REIT's ratings once the transaction closes.

Moody's would likely upgrade Omega's ratings should the transaction close as expected and the REIT continue to demonstrate sound operating and earnings trends over the interim. Stable tenant operating performance (as evidenced by EBITDAR coverage) and maintenance of Net Debt/EBITDA below 5x would be necessary for an upgrade.

Moody's would likely affirm Omega's ratings and confirm Aviv's ratings each with stable outlooks should the merger fail to close or, in the case of Omega, should the REIT increase leverage levels closer to 6x. Sustained deterioration in property level coverage ratios from major tenants (at either Omega or Aviv) could also return the outlook to stable.

On February 27, 2013, Moody's upgraded Omega's senior unsecured debt rating to Ba1 from Ba2 with a stable outlook. On May 20, 2013, Moody's raised Aviv's bond rating to Ba3 from B1 with a stable outlook.

Omega Healthcare Investors, Inc. (NYSE: OHI), based in Hunt Valley, MD, is a REIT that invests in and provides financing to the long-term care industry. At September 30, 2014, Omega owned or held mortgages on 562 skilled nursing facilities, assisted living facilities and other specialty hospitals with approximately 63,532 licensed beds (61,189 available beds) located in 37 states and operated by 50 third-party healthcare operating companies.

Aviv REIT, Inc. (NYSE: AVIV), based in Chicago, is a REIT that specializes in owning post-acute and long-term care SNFs and other healthcare properties. The Company currently owns 316 properties that are triple-net leased to 38 operators in 29 states.

The principal methodology used in these ratings was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lori Marks
Asst Vice President - Analyst
Commercial Real Estate Finance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Nick Levidy
MD - Structured Finance
Commercial Real Estate Finance
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's revises Omega's outlook to positive and places Aviv on review for upgrade after merger announcement
No Related Data.
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