(The following statement was released by the rating agency)Overview
-- Spirit Realty Capital Inc.recently completed an IPO of commonstock.
-- Spirit used proceeds from the IPO to repay a portion of itsoutstanding term loan and extinguished the remainder of the term loan througha conversion into common shares.
-- As a result of these transactions, we are raising the corporate creditrating on Spirit to 'B' from 'CCC+' and withdrawing our ratings on thecompany's term loan (a '4' recovery rating and 'CCC+' senior secured rating).
Rating ActionOn Oct. 5, 2012, Standard & Poor's Ratings Services raised its corporatecredit rating on Spirit Realty Capital Inc. (Spirit) to 'B' from 'CCC+' andrevised our outlook on the company to stable from developing. We also withdrewour rating on the company's senior secured term loan after the company repaidand extinguished it.RationaleThe upgrade reflects Spirit Realty Capital Inc.'s successful completion of aninitial public offering (IPO) of its common stock, which raised $465 millionof net proceeds. The company also completed related contingent deleveragingtransactions, as it detailed in S-11 filings. Specifically, Spirit retired a$729 million term loan outstanding that was due to mature in August 2013. Theterm loan consisted of two tranches: term loan B ($399 million), which Spiritrepaid with IPO proceeds, and term loan C ($330 million), which Spiritextinguished and converted into shares of its common stock. The IPO reducedleverage; however, low debt coverage metrics contribute to our view of thecompany's financial risk profile as "aggressive." We consider the company'sliquidity "adequate", despite a high dividend payout ratio, as liquidity isbolstered with the addition of access to a revolving credit facility ($100million). While we expect continued stability in portfolio occupancy, rents,and cash flows, tenant concentration is high. Should a large tenant default,the impact to Spirit's cash flow could be severe. As a result, we continue toconsider Spirit's business profile "weak."
Spirit is a publicly traded REIT that focuses on the ownership oftriple-net-leased retail properties under long-term leases (average remaininglease term 11.4 years). Spirit's balance sheet included $3.6 billion in grossinvestments in real estate and loans at June 30, 2012, and its debt totaled$1.9 billion after the term loan repayment/conversion (all of which issecured). The company owned or financed 1,183 properties (1,096 owned) in 47states. Spirit leases the properties in its owned portfolio to approximately165 tenants in 18 different industry sectors, including general, specialty anddiscount retail; movie theaters; automotive dealers; educational andrecreational facilities; supermarkets, and restaurants.
Portfolio occupancy remained high at 98.2% as of June 30, 2012, partlyreflecting the company's strategy of selling or re-leasing properties thatbecome vacant. However, Spirit's tenant base is highly concentrated. Followingthe February 2012 merger between ShopKo Stores Operating Co. LLC (not rated)and Pamida Stores Operating Co. LLC (not rated), the combined companyconstitutes 30.2% of Spirit's revenues. Property-level rent coverage for theShopko/Pamida stores in Spirit's portfolio was over 2x at June 30, somewhatmitigating the concentration risk.
Pro forma for the IPO, we believe that Spirit's debt service coverage improvesto the mid-1x area and leverage declines to roughly 60% on a book basis, butdividend coverage has little downside cushion. Under our base-case scenario,we assume that modest contractual rent increases offset potential rentallosses due to stress among a few of the company's smaller tenants. We alsoassume the company reduces leverage modestly over time by meeting regularlyscheduled principal amortization of its secured debt through operating cashflow.
We consider the company's liquidity as "adequate."
Our liquidity assessment reflects the following factors and assumptions:
-- We expect the company's liquidity sources through October 2013 to bemore than 1.2x its uses, even if EBITDA were to decline by 15%.
-- Spirit faces $29 million of consolidated debt payments as of June 30,2012 (including principal amortization and balloon payments at maturity) forthe remainder of 2012 and roughly $48 million for the full year 2013.
-- Spirit also faces roughly $106 million of annual common dividends andmodest (less than $10 million) portfolio related capital expenses.
We expect Spirit will fund these obligations with cash on hand ($104 millionat June 30, 2012, pro forma for the IPO), operating cash flow of roughly $125million for the next four quarters, and its new secured revolving creditfacility ($100 million, due Sept. 25, 2015, and subject to a one-yearextension at the company's option). One of the covenants governing Spirit'srevolving credit facility requires the company to maintain a minimumunencumbered asset base of 1.75x outstanding commitments.OutlookThe outlook is stable. The company materially reduced balance-sheet leveragethrough a recent IPO and related term loan repayment/conversion transaction.Despite our expectation for stability in portfolio occupancy, rents, and cashflows over the next 12 months, the timeframe of our outlook, we would likelylower the rating if the company's liquidity becomes constrained or debtcoverage measures deteriorate, perhaps due to tenant challenges. The highdividend payout ratio and highly concentrated tenant base contribute to ourview that an additional upgrade is unlikely in the next year.
Related Criteria And Research
-- Issuer Ranking: North American REITs, Strongest To Weakest, July 26,2012
-- Takeaways From The 2012 ICSC Convention: The Mood Among RetailLandlords Is Cautiously Optimistic, June 14, 2012
-- Industry Report Card: Improvements In Operating Fundamentals Bode WellFor North American REITs, May 4, 2012
-- General Criteria: Methodology And Assumptions: Liquidity DescriptorsFor Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies,June 21, 2011Ratings ListRatings Raised; Outlook RevisedTo FromSpirit Realty Capital Inc. B/Stable/-- CCC+/Developing/--Ratings WithdrawnSpirit Realty Capital Inc.Senior Secured NR CCC+Recovery Rating NR 4
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