Net proceeds from the offering of
In addition to the 2024 notes, Fitch currently rates
--Issuer Default Rating (IDR) 'BBB+';
The Rating Outlook is Stable.
KEY RATING DRIVERS
Diverse Net Lease Portfolio
Fitch views the portfolio's tenant industry diversification favorably. The portfolio includes 47 tenant industries, and top segments based on 1Q'14 revenues were convenience stores (10.3%), drug stores (9.5%), dollar stores (9.1%), casual dining and quick service restaurants (8.5%) and health and fitness (6.9%). Industry expansion is consistent with
Improving Tenant Credit
The company has 211 tenants and its top 15 tenants comprised 46.4% of 1Q'14 rent, which is somewhat concentrated. The top three tenants at
Solid Fixed-Charge Coverage
Fixed charge coverage is solid for the rating at 3.1x in 1Q'14 pro forma for the
Fitch's base case projection is predicated on contractual base rent increases (1.5% same-store rent growth) and additional acquisitions (assumed to be
Forward-Looking Strategic Planning
Strong Liquidity and Access to Capital
Liquidity coverage pro forma is strong at 5.0x for the period
Longer-term, debt maturities are manageable with 1.1% maturing during the remainder of 2014 followed by 6.1% in 2014 and 13.2% in 2016 pro forma. Contingent liquidity is adequate for the rating with unencumbered asset coverage of net unsecured debt of 2.8x at
Fitch anticipates that the company's adjusted funds from operations (AFFO) payout ratio will remain in the mid-to-high 80% range (85.5% in 1Q2014 2012, although this ratio increased to 88.4% in 2013 as a result of the dividend increase associated with the ARCT acquisition). Recent AFFO payout levels indicate the company's ability to generate a modest amount of internal liquidity.
Decline in Recently Elevated Leverage
Net debt to recurring operating EBITDA was 6.1x at 1Q'14 but improves to 5.5x pro forma compared with 6.6x in 2012 and 5.3x in 2011. Leverage was skewed upward in 2012 due to the incurrence of debt prior to the close of the ARCT transaction. Under Fitch's base case, leverage is forecast to remain around 5.5x in 2014-2015, which would remain appropriate for the rating. In a stress case (principally a material tenant bankruptcy) scenario not anticipated by Fitch, leverage could sustain above 6.0x, which would be weak for the rating.
Preferred Stock Notching
The two-notch differential between
The following factors may result in positive momentum in the ratings and/or Rating Outlook:
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x (pro forma fixed charge coverage is 3.1x);
--Fitch's expectation of leverage sustaining below 4.0x (pro forma leverage is 5.5x);
--Fitch's expectation of unencumbered assets-to-unsecured debt sustaining above 3.0x pro forma coverage is 2.8x).
The following factors may result in negative momentum in the ratings and/or Rating Outlook:
--Fitch's expectation of fixed-charge coverage sustaining below 2.5x;
--Fitch's expectation of leverage sustaining above 6.0x;
--Tenant bankruptcies resulting in a weakening of the company's credit metrics.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'Rating U.S. Equity REITs and REOCs (Sector Credit Factors) (
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (
--'Recovery Ratings and Notching Criteria for Equity REITs' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Criteria for Rating U.S. Equity REITs and REOCs
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Recovery Ratings and Notching Criteria for Equity REITs
Source: Fitch Ratings
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