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Rating Action: Moody's assigns Prime-2 rating to Realty Income's $1 billion commercial paper program; outlook stable
Global Credit Research - 21 Aug 2020
New York, August 21, 2020 -- Moody's Investors Service ("Moody's") has assigned a Prime-2 (P-2) short-term rating to Realty Income Corporation's ("Realty Income") new $1 billion unsecured commercial paper (CP) program in the US. Concurrently, Moody's affirmed the REIT's existing ratings, including its A3 senior unsecured rating. The rating outlook is stable.
The affirmation reflects the REIT's conservative leverage combined with the company's disciplined financial policy, and highly occupied, diversified net-lease retail portfolio across various industries.
The following rating was assigned:
Issuer: Realty Income Corporation
Commercial Paper Program at Prime-2
The following ratings were affirmed:
Realty Income Corporation -- senior unsecured at A3; senior unsecured shelf at (P)A3; preferred shelf (P)Baa1
Issuers: Realty Income Corporation
Outlook, Remains Stable
The P-2 short-term rating reflects Realty Income's excellent liquidity position, supported by its $3 billion unsecured revolving credit facility maturing in 2023. The CP notes will be issued by Realty Income and rank pari passu with other unsecured senior debt. The CP program has same day funding availability. Moody's expects the REIT to tap its new commercial paper program as a more cost effective alternative to drawing on its credit facility; borrowings under the CP program are expected to be a very modest portion of the company's overall capital structure and we expect Realty Income to maintain ample availability on its unsecured line as it has historically always done.
The A3 senior unsecured rating also considers senior management's deep expertise in the net-lease space and proven business model with durable cash flows through various economic cycles. These credit strengths are offset by some modest tenant and industry concentration(s). Other key challenges include a difficult operating environment for certain business segments of the REIT's portfolio, specifically theatres and health & fitness tenants. That said, rent collections in the second quarter were strong, one of the highest among the rated peer group.
Realty Income's balance sheet is well-positioned in the current environment and we expect the REIT to maintain its excellent financial position even as it seeks continued growth. Effective leverage and net debt to EBITDA (including Moody's standard adjustments) stands at 34% and 5.5x for the trailing twelve months ended June 30. The company has grown remarkably over the last several years without compromising its strong credit profile, acquiring $3.7 billion in assets in 2019 alone. As of the end of the second quarter, the REIT had $23 billion in gross assets. Additionally, the company's retail portfolio is relatively well-protected from ecommerce penetration with convenience stores (12% of rental revenues), drug stores (9.1%), dollar stores (8.1%), and grocery stores (8%) as its top industry exposures.
Lastly, the REIT's excellent liquidity position is supported by its $3.0 billion unsecured credit facility which expires in March 2023 with two six-month extension options. There was $628 million outstanding on the credit facility as of June 30, 2020. The REIT also had $335 million of cash and short-term investments at quarter-end. Debt maturing through the end of 2021 is negligible with $69.5 million maturing for the remainder of 2020 and $68.8 million maturing in 2021.
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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward 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.
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 June 30, 2020, Realty Income owned 6,541 properties located in 49 states, Puerto Rico, and the United Kingdom.
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.
Alice Chung Vice President - Senior 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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