Realty Income Investment Grade Debt Ratings Upgraded by Standard & Poor's
ESCONDIDO, Calif., June 20, 2013
ESCONDIDO, Calif., June 20, 2013 /PRNewswire/ --Realty Income Corporation
(Realty Income), The Monthly Dividend Company^®, (NYSE:O) today announced that
Standard & Poor's Ratings Services upgraded the company's senior unsecured
debt ratings to BBB+ from BBB and its preferred stock ratings to BBB- from
BB+, with a stable outlook.
Standard & Poor's issued a press release entitled "Realty Income Corp. Is
Upgraded to' BBB+', Outlook is Stable; Senior Unsecured Debt Ratings Are
Raised to BBB+", published by Primary Credit Analyst, Elizabeth Campbell and
Secondary Credit Analyst, George Skoufis, on June 19, 2013. The press release,
in its entirety, is reproduced with permission of Standard & Poor's, a
division of the McGraw-Hill Companies, Inc.
oEscondido, Calif.-based Realty Income Corp. is the largest owner of net
leased commercial real estate in the U.S. and its portfolio of
well-diversified properties maintained high occupancy and steady
performance throughout the financial downturn.
oThe company has expanded its portfolio, improving diversification by
tenant and industry, and increasing exposure to investment grade-rated
tenants, which supports our expectation for earnings growth.
oWe are raising our ratings on Realty Income, including the corporate
credit rating to 'BBB+' from 'BBB'.
oThe stable outlook reflects our expectation that portfolio cash flow will
continue to exhibit low earnings volatility over the next two years,
supported by long-term leases and management's focus on increasing
concentrations to investment-grade tenants while maintaining moderate
On June 19, 2013, Standard & Poor's Ratings Services raised its corporate
credit rating on Realty Income Corp. (Realty Income) to 'BBB+' from 'BBB'. The
outlook is stable. At the same time, we raised our senior unsecured debt
ratings to 'BBB+' and our ratings on the company's preferred stock to 'BBB-'.
(See ratings list below.) The rating actions affect roughly $3.0 billion of
rated debt and preferred securities.
The upgrade acknowledges Realty Income's diversified portfolio of
triple-net-leased retail and commercial properties and its prudent
underwriting to date, which collectively have supported historically stable
cash flow and sound debt service coverage measures. The company has executed
on a strategic shift over the prior few years to increase investments in
properties leased to investment-grade tenants (now contributing roughly 35% of
revenue) through recent merger and acquisition activity. We currently consider
Realty Income's business profile "strong," an improvement from our prior
"satisfactory" assessment, as its large, diversified portfolio (subject to
long-term leases) and higher average credit quality tenant base position the
portfolio both defensively (to withstand potential protracted tenant stress)
and offensively (to continue to pursue accretive investments) over the next
few years. We consider Realty Income's financial profile "intermediate" due to
a moderately leveraged balance sheet and we consider the company's liquidity
"Realty Income invests in single-tenant commercial properties throughout the
U.S. The company, an S&P MidCap 400 Index constituent, ended the March 31,
2013, quarter with a portfolio of 3,525 properties dispersed throughout 49
states and Puerto Rico. Realty Income's portfolio assets are leased to 195
different operators across 46 industries, providing strong diversification.
Retail continues to comprise the majority of rents (79%) although we expect
the company to continue to grow its proportion of nonretail investments
(currently 21%) over the next few years.
"We believe the company's $3.2 billion acquisition of American Realty Capital
Trust (ARCT) in a transaction that closed in January 2013 favorably advanced
Realty Income's strategic objective of increasing its investment in nonretail
properties that are leased primarily to investment-grade rated tenants subject
to long-term leases. Realty Income's total enterprise value (market basis) was
$12.9 billion at March 31, 2013.
"The company now derives roughly 35% of revenue from investment grade-rated
tenants, the largest of which are FedEx (5.7% of revenues), Family Dollar
Stores (3.5%), and Diageo (3.3%). The ARCT transaction also expanded Realty
Income's portfolio to include nonretail commercial properties, which we
believe are more exposed to potential residual value erosion (at least
expiration) than its retail assets. However, Realty Income continues to employ
conservative underwriting, in our view, and its historical recovery rates in
tenant bankruptcies have been high. We consider the residual value risk of the
ARCT assets is somewhat mitigated by the creditworthy tenant base and the real
estate attributes (such as importance to the tenant's business).
"Despite some pressured tenants during the downturn, Realty Income's total
portfolio remains well occupied (97.7% at March 31, 2013), under long-term
(15- to 20-year) net leases. Lease expirations in the near term are relatively
low, as leases for properties that generate 4.3% of rental revenue expire
through year-end 2014. Additionally, nearly two-thirds of aggregate lease
expirations through year-end 2013 are on subsequent lease renewals, which have
historically correlated to a strong likelihood of continued renewal.
"Realty Income maintains a more conservative balance sheet than do most REITs.
The company's debt is favorably long term (with a weighted average debt
maturity of more than seven years) and is well matched against Realty Income's
11-year weighted average remaining lease term. Additionally, the company's
balance sheet is highly transparent because it has no unconsolidated
(off-balance-sheet) investments. Realty Income faces no senior unsecured debt
maturities until 2015 (when a $150 million unsecured note matures) and faces
roughly $87 million of mortgage maturities through year-end 2014 (that
management intends to pay off at maturity). Standard & Poor's defined leverage
(which includes preferred stock and accrued interest as debt) was 47% on a
cost basis and 31% on a market capitalization basis.
"For the quarter ended March 31, 2013, Standard & Poor's calculation of debt
service coverage for Realty Income was 3.9x, and fixed-charge coverage (FCC),
including preferred dividends, was 3.0x. Current coverage levels remain
favorably supported by a fixed-rate debt structure and a revenue stream that
consists solely of recurring income. Funds from operations coverage of all
fixed charges, including the common dividend, is 1.2x.
"Our scenario analysis assumes that earnings erosion from a modest level of
unexpected tenant vacancies would be offset by the company's contractual rent
growth from in-place leases and contributions from accretive acquisitions
(estimated to total $550 million in 2013, in addition to the ARCT
transaction). We believe that Realty Income continues to finance acquisitions
in a leverage-neutral manner and that asset sales for 2013 will total roughly
$100 million. Under this scenario, the company's debt service and FCC measures
will strengthen during 2013 from year-end 2012 levels, to the high-3x and
low-3x areas, respectively. Total coverage remains stable, in the 1.1x area.
Realty Income was among the few REITs to continue to pay its common dividend
in cash during the downturn.
Realty Income's current liquidity is strong, in our view, relative to the
company's capital needs through year-end 2014. The company had a modest ($4.2
million) cash balance at March 31, 2013 and has access to a $1 billion
unsecured acquisition credit facility ($117 million of borrowings outstanding
at March 31, 2013).
"The company's debt maturities over the next two years are modest and consist
solely of mortgage debt ($24.8million due 2013 and $62.1 million due 2014).
We expect Realty Income to continue to generate roughly $70million of free
cash flow after dividends (preferred and common) that we expect to total
roughly $475million in 2013, following the most recent dividend increase. We
assume the company raises its dividend in 2014, but at a rate below its
"Despite the assumption of mortgage debt (8.7% secured debt to total assets)
along with the ARCT transaction, Realty Income's property portfolio remains
largely unencumbered. While a large unencumbered pool provides additional
financial flexibility, in that the company could mortgage assets to raise
capital, it is Realty Income's intent to repay mortgages as they mature.
"The triple-net-lease structure results in low capital-expenditure
requirements. We expect portfolio-related capital expenditures to rise
modestly (to the $10 million to $15 million range, annually) with the
company's recent portfolio expansion. If portfolio vacancy rate increases,
sourcing new tenants could require the payment of leasing commissions, and
vacant properties would likely need retrofitting in order to accommodate new
"We expect Realty Income to fund acquisitions (which we estimate at $550
million this year, in addition to the $3.2 billion ARCT acquisition, at
average yields in the low-7% area) in a leverage-neutral manner, as it has
done historically, through a mix of issuance of common equity, long-term
senior unsecured debt or preferred stock, and sales proceeds (that we estimate
at roughly $100 million this year).
The outlook is stable. We expect portfolio cash flow will continue to exhibit
modest steady growth over the next two years, supported by long-term leases
and Realty Income's focus on increasing concentrations to investment-grade
tenants. We also expect Realty Income to maintain its moderate leverage,
above-average debt protection measures and strong liquidity as it continues to
pursue a moderate level of acquisition-oriented growth.
"We see limited downside risk to the ratings at this time, given Realty
Income's strong balance sheet, liquidity, and debt coverage measures. However,
we would consider revising our outlook to negative if the company struggles to
manage potential large tenant losses such that FCC drops below 2.7x and/or
total coverage of the common dividend dips below 1.0x.
"Given the recent upgrade and our expectation for key credit measures to
remain steady, we do not foresee any additional ratings improvement over the
two-year time horizon of our ratings outlook.
"Related Criteria And Research
oManagement And Governance Credit Factors For Corporate Entities And
Insurers, Nov.13, 2012
oMethodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
oMethodology And Assumptions: Liquidity Descriptors For Global Corporate
Issuers, Sept. 28, 2011
o2008 Corporate Criteria: Analytical Methodology, April 15, 2008
oKey Credit Factors: Global Criteria For Rating Real Estate Companies, June
Realty Income Corp.
Corporate Credit Rating BBB+/Stable/ - - BBB/Stable/ - -
Senior Unsecured BBB+ BBB
Preferred Stock BBB- BB+"
Realty Income, The Monthly Dividend Company^®, is a New York Stock Exchange
real estate company dedicated to providing shareholders with dependable
monthly income. To date the company has declared 516 consecutive common stock
monthly dividends throughout its 44-year operating history and increased the
dividend 72 times since Realty Income's listing on the New York Stock Exchange
in 1994. The monthly income is supported by the cash flow from over 3,500
properties owned under long-term lease agreements with regional and national
retail chains and other commercial enterprises. The company is an active buyer
of net-leased properties nationwide. Additional information about the company
can be obtained from the corporate website at www.realtyincome.com or
Note to Editors:
Realty Income press releases are available on the Internet at
SOURCE Realty Income Corporation
Contact: Tere Miller, Vice President, Corporate Communications,
+1-760-741-2111, ext. 1177
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