Realty Income Corporation -- Moody's affirms Realty Income's A3 senior unsecured rating; outlook stable

Rating Action: Moody's affirms Realty Income's A3 senior unsecured rating; outlook stableGlobal Credit Research - 07 Mar 2022New York, March 07, 2022 -- Moody's Investors Service ('Moody's') has affirmed Realty Income Corporation's ('Realty Income') existing ratings, including its A3 senior unsecured rating. The rating outlook is stable.The stable outlook reflects our expectation that the REIT will continue to grow in a disciplined manner without compromising its financial flexibility and leverage. It also reflects our expectation that management will maintain a strong operating profile with high occupancy rates and healthy earnings growth.The following ratings were affirmed:Issuer: Realty Income Corporation - senior unsecured at A3; senior unsecured shelf at (P)A3; preferred shelf (P)Baa1, Commercial Paper Program at Prime-2Outlook Actions:Issuers: Realty Income CorporationOutlook, Remains StableRATINGS RATIONALERealty Income's A3 senior unsecured rating reflects management's deep expertise in the net-lease space and proven business model with durable cash flows through various economic cycles. The rating also reflects Realty Income's conservative financial policies marked by modest leverage of 33% at December 31, 2021. On a net debt to EBITDA basis, leverage is below 5.5x after adjusting for the VEREIT merger and new investments. The REIT's low cost of capital and scalability has allowed the company to continue growing its high-quality portfolio of net lease assets characterized by strong credit tenancy and above average rent coverages.Our rating also considers Realty Income's geographically diverse portfolio with concentrations in essential and necessity-based retail, shielding the company from major disruptions and threats of e-commerce penetration. Following the closing of the VEREIT merger, Realty Income's industry concentrations have become more diversified with grocery stores taking the top spot at 10.2% followed by convenience stores at 9.1% of annualized contractual rent. Naturally, segments which were of greater concern during COVID such as theatres and health & fitness are now down to 3.4% and 4.7% respectively, as of year-end 2021. Tenant concentration has also improved as a result of Realty Income's expanded platform, with Walgreens as its biggest tenant at 4.1% of ABR, followed by Dollar General (4%) and 7-Eleven (4%). Moody's notes that the company's recent announcement to acquire The Encore Boston Harbor Resort and Casino under a 30-year long-term net lease agreement with Wynn Resorts, Limited will also bring some tenant and asset concentration risk. Pro-forma for this deal which is expected to close in 4Q22, this will represent the REIT's largest single-tenant asset at more than 3.1 million square feet and thereby one of its biggest tenants at less than 3.5% of annualized base revenue.Key credit challenges that remain include the company's modest industry concentrations and a tenant roster that is comprised of many non-investment grade customers.Lastly, the REIT's debt obligations are well-laddered with $271 million in mortgages coming due in 2022 and approximately $62 million maturing in 2023 (excluding borrowings under the credit facility). The REIT has access to a $3.0 billion unsecured revolver that matures in March 2023 with two six-month extensions available at the company's option. As of December 31, 2021, the company had $650 million outstanding on the credit facility. Realty Income's financial flexibility is also supported by a portfolio which is largely unencumbered.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward ratings movement is unlikely and would require the REIT to sustain effective leverage below 30%, net debt to EBITDA closer to 4x, and fixed charge coverage above 5.0x. No industry representing more than 10% of annualized base rent and no tenant at more than 5% of rent would also be viewed positively.Downward rating pressure would result from any highly levered acquisition, a reversal to its tenant and industry diversification such that any tenant represents more than 10% of total rent, secured debt approaching 10% of gross assets, fixed charge coverage below 4.0x, and net debt to EBITDA approaching 6.0x.Realty Income Corporation [NYSE: O], headquartered in San Diego, California, USA, is a real estate investment trust (REIT) that invests in free-standing, single-tenant properties. At December 31, 2021, Realty Income's portfolio consists of 11,136 properties located in all 50 U.S. states, Puerto Rico, the U.K. and Spain.The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1272320. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. Alice Chung Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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