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VEREIT Operating Partnership, L.P. -- Moody's upgrades VEREIT's ratings to Baa2; outlook stable

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Rating Action: Moody's upgrades VEREIT's ratings to Baa2; outlook stableGlobal Credit Research - 25 Mar 2021New York, March 25, 2021 -- Moody's Investors Service ("Moody's") has upgraded to Baa2 the ratings, including the senior unsecured rating, for VEREIT Operating Partnership, L.P., the main operating subsidiary of VEREIT, Inc. In the same rating action, Moody's changed the rating outlook to stable from positive. The ratings upgrade reflect the company's resilient and improved portfolio as one of the largest owners of good-quality net lease assets in the US, strengthened balance sheet, and better access to capital for growth. The stable outlook incorporates Moody's expectation that VEREIT will continue to prudently manage its balance sheet and liquidity, while growing the portfolio on leverage-neutral basis.The following ratings were upgraded:Issuer: VEREIT Operating Partnership, L.P.- Backed senior unsecured debt to Baa2 from Baa3- Backed senior unsecured shelf to (P)Baa2 from (P)Baa3Outlook action:Issuer: VEREIT Operating Partnership, L.P.-Outlook changed to Stable from PositiveRATINGS RATIONALEThe upgrade of VEREIT's Baa2 senior unsecured rating considers the firm's strengthened credit profile, supported by an improved balance sheet with a flexible capital structure, and a resilient, more diversified real estate portfolio. The challenges posed by Covid-19 (coronavirus) pandemic pressured the REITs occupancy and cash flow in 2020, due from rent deferrals and lower rent collection rates at the onset of the outbreak. However, collections were strong after the third quarter through January 2021 at 98% and 99%, respectively, while deferrals remain modest relative to total adjusted funds from operations. The REIT has also improved its liquidity and access to the capital markets and lengthened its debt maturity schedule, in line with its 2015 business plan. VEREIT is now well-positioned to return to growth on a leverage-neutral basis in 2021, with management guiding to between $1.0 billion and $1.3 billion of new acquisitions, offset by between $250 million to $350 million of dispositions, excluding partnerships. Finally, the rating incorporates VEREIT's strengthened corporate governance policies and procedures commensurate with its rating level.As of 31 December 2020, VEREIT's effective leverage (total debt plus preferred stock as a percentage of gross assets) and net debt to EBITDA (Moody's adjusted, which includes 75% of preferred stock as debt) were approximately 37% and 5.8x, respectively, compared to approximately 38% and 6.0x at year-end 2019. Management has maintained its commitment of operating with a net debt to EBITDA between 5.0x and 6.0x (company's calculation), which excludes preferred stock. Additionally, the REIT continues to simplify its capital structure through the reduction of both secured debt and preferred equity. Supported by long-term leases and high occupancy levels, the REIT's net lease portfolio continues to generate stable and predictable cash flows and strong EBITDA margins that are consistently in the mid-80% range with the portfolio at near full occupancy of 98% for the quarter. Fixed-charge coverage ratio remains solid above 3.0x at 3.3x, as of year-end 2020.These credit strengths are partially offset by some remaining tenant concentration with Red Lobster at 4.8% of annual rent income (ARI), and industry concentrations in casual dining restaurants at 12% of ARI, which have been operationally challenged during the pandemic along with fitness centers, and other nonessential businesses. Moreover, there is some key person risk within its senior management, which is to some extent mitigated by the REIT's deep and veteran leadership team.VEREIT's liquidity position is adequate, supported by its undrawn $1.5 billion unsecured revolving credit facility and $523 million cash position, both as of year-end 2020. Near-term debt maturities are minimal with $73 million of mortgage notes (1.2% of total debt), maturing for the remainder of 2021, as of 24 February 2021, followed by$267 million (4.5% of total debt) maturing in 2022. The REIT has no corporate maturities due before $500 million of unsecured notes come due in 2024.The stable outlook incorporates Moody's expectation that VEREIT will continuing to prudently manage its balance sheet and consistently maintain, at a minimum, its current credit metrics levels while growing the portfolio on leverage neutral basis. The outlook also incorporates our expectation that the REIT will maintain the recurring quality of its cash flows as well as the portfolio's diversification and granularity.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating movement is not expected in the near term, but would result from the following on a consistent basis: 1) total debt plus preferred stock as a percentage of gross assets approaching 30%; 2) net debt to EBITDA approaching 5.0x, excluding preferred stock; 3) fixed charge coverage ratio approaching 4.0x; and 4) continued access to the capital markets.Downward rating pressure would result from the following factors on a consistent basis: 1) total debt plus preferred stock as a percentage of gross assets above 40%; 2) net debt to EBITDA approaching 6.5x, excluding preferred stock; 3) fixed charge coverage ratio below 3.0x; 4) unencumbered assets approaching 60%, and 4) any liquidity issues or challenges related to the lengthening its debt maturities.VEREIT, Inc. [NYSE: VER] is a full-service real estate operating company which owns and manages one of the largest portfolios of single-tenant commercial properties in the U.S. VER provides equity capital to creditworthy corporations in return for long-term leases on their properties. The REIT targets single-tenant properties on long-term net leases that are strategically located and mission-critical to the business operations of the tenant, as well as retail properties that offer necessity and value-oriented products or services. As of 31 December 2020, the REIT's portfolio comprised 3,831 operating properties, totaling approximately 90.0 million rentable square feet in the United States and Puerto Rico.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.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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.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. Juan Acosta Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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