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Rating Action: Moody's affirms ADC's Baa2 issuer rating; outlook revised to positive
Global Credit Research - 12 Aug 2020
Approximately $300 million of securities affected.
New York, August 12, 2020 -- Moody's Investors Service (Moody's) has affirmed Agree Realty Corporation's (ADC) Baa2 issuer rating. In the same rating action, the rating agency also assigned a (P)Baa2 rating to Agree Limited Partnership's senior unsecured shelf and a Baa2 rating to its inaugural senior unsecured bond issuance, which is currently being marketed. Additionally, the rating outlook for ADC was revised to positive from stable.
The affirmation and assignment reflect ADC's solid credit profile, supported by its low leveraged balance sheet and flexible capital structure with a resilient operating portfolio that is largely unencumbered. The REIT's liquidity position continues to be reinforced by its activities in the equity capital markets, allowing the firm to fund its ambitious property acquisition plans and meet its minimal near-term debt maturities and modest development commitments. In light of the challenged operating environment impacted by COVID-19, the net lease company is defensively positioned to withstand short-term credit pressure.
..Issuer: Agree Limited Partnership
....Senior Unsecured Regular Bond/Debenture (Local Currency), Assigned Baa2
....Senior Unsecured Shelf (Local Currency), Assigned (P)Baa2
..Issuer: Agree Realty Corporation
.... Issuer Rating (Local Currency), Affirmed Baa2
..Issuer: Agree Realty Corporation
....Outlook, Changed To Positive From Stable
..Issuer: Agree Limited Partnership
....Positive Outlook Assigned
Agree Realty's strong and low leveraged balance sheet, ample liquidity, and good financial flexibility support its growth plans while also meeting its minimal near-term obligations. To date, ADC's sculpted retail portfolio remains resilient, operating at near full occupancy and with some of the highest reported rent collection rates in the net lease sector for second quarter 2020 at 91% and for July 2020 at 95%, as of August 7th, with minimal rent deferrals of approximately 3%. The largely unencumbered and predominantly triple net lease portfolio benefits from a high exposure to strong national and regional retailers with minimal near-term lease expirations. Management remains selective in its long-term relationships with retailers that tend to have public investment-grade ratings, resilient omnichannel platforms and other defenses against e-commerce. The enhanced portfolio is also benefitting from a reduced exposure to nonessential businesses or to businesses that rely heavily upon social gathering, which have thus far protected the firm against temporary business interruptions (store closures) and declines in discretionary consumer spending. ADC's strengthened credit profile has been bolstered by its frequent activity in the equity capital markets, reducing leverage on a pro forma basis, and boosting its liquidity position to support leverage-neutral acquisitions. Year-to-date through Q2 2020, the company has completed $500 million in gross property acquisitions against its guidance of $900 million to $1.1 billion, and intends to sell between $50 million to $75 million of assets. For the first half of 2020, adjusted funds from operations grew 7.6% year-over-year driven by a combination of new property acquisitions and some rent escalations.
After Moody's adjustments for operating lease liabilities and accounting for only unrestricted cash, last 12-month (LTM) net debt to EBITDA for Q2 2020 was 4.1x and approximately 1.9x, on a pro-forma basis for anticipated settlements of the equity forward contracts before the end of Q2 2021. Effective leverage (total debt + preferred stock as a percentage of gross assets) for the same period was approximately 25%. Secured debt levels remain low at just 1% of gross assets, with a total of $34 million in property-level mortgages. The REIT's financial flexibility is supported by a near-fully unencumbered asset base at 98% of gross assets and a fixed charge coverage ratio consistently above 4.0x, providing a buffer against unexpected cash flow decline.
Apart from the downside risk stemming from the challenged operating environment as well as the threat of new infection rates, the REIT's credit constraints include its smaller gross asset size, although rapidly growing, and key person risk in its executive leadership. There is some tenant concentration with Walmart Inc. (Aa2 stable), representing 7.6% of annual base rent (ABR), however, this is substantially mitigated by the tenant's strong franchise as the largest retailer in the world.
The positive rating outlook incorporates our expectation that ADC will maintain discipline over its leverage and liquidity profile, while continuing its accretive growth plans on a leverage-neutral basis. The outlook also incorporates the REIT's maintenance of the portfolio's improved quality, diversification, and current operational performance at a minimum. In addition, it is expected that the company will continue to deepen its access to the public debt capital markets as part of its long-term, unsecured borrowing strategy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating movement would be predicated on the REIT achieving the following on a consistent basis: 1) maintenance of portfolio and recurring earnings growth trajectory on a leverage neutral basis; 2) total debt plus preferred stock below 35% of gross assets; 3) LTM net debt to EBITDA (Moody's adjusted) below 5.5x; 4) fixed charge coverage ratio above 4.0x; and 5) maintenance of portfolio granularity such that top tenant sector and top state concentration each remain less than 10% of ABR.
In light of the positive outlook, a downgrade is unlikely in the next 12 months, however, due to the ongoing unpredictable effects and uncertainty from the current pandemic, a return to stable outlook or downward rating pressure is possible. This would result from a deterioration in the credit profile such that the following occurs on a consistent basis: 1) failure or inability to complete its planned acquisitions; 2) total debt plus preferred stock approaching 40% of gross assets; 3) LTM net debt to EBITDA (Moody's adjusted) approaching 6.0x; 4) fixed charge coverage ratio approaching 3.5x; 4) secured debt levels exceed 10% of gross assets or the unencumbered asset pool decreases below 80%; and 5) a deterioration in the portfolio's occupancy levels and EBITDA margins. Additionally, the portfolio's top tenant accounting for more than 10% of ABR, and the top tenant sector and top state concentration approaching 15% of ABR.
Headquartered in Bloomfield Hills, Michigan, Agree Realty Corp. [NYSE: ADC] is a fully integrated, self-managed REIT that owns, acquires, and develops freestanding single-tenant properties that are net leased to leading US national and super-regional retail companies. As of June 30, 2020, the REIT wholly-owned 936 properties, totaling 18.4 million square feet (SF) of gross leasable area (GLA), located across 46 states.
The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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.
Juan Acosta AVP-Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Philip Kibel Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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