Fitch Ratings has affirmed the ratings of
Fitch has also assigned a 'BBB' rating to
The affirmations and Stable Outlook reflect the company's solid operating results and recovered rent collections, as well as Fitch's expectations that the company will sustain metrics appropriate for the rating and maintain stable operating performance over the long term.
Key Rating Drivers
Strong Asset Quality: SRC's operational performance returned to pre-COVID levels with occupancy at 99.8% and collections at 99.7% as of
Well Balanced Portfolio Diversification: As of
Fitch also views favorably the growing percentage of industrial and manufacturing assets (20.7% of ABR; up from 14.9% as of
Investment Grade Credit Metrics: Fitch expects SRC's leverage (net debt before preferred stock to operating EBITDA) to sustain in the low-to-mid-5x range consistent with the company's financial policy of below 5.5x as well as with historical leverage levels. Management has demonstrated a commitment to preserving the balance sheet as it resumed external growth activity, and issued
Solid Execution of Acquisition Strategy: Fitch views SRC's portfolio transition favorably as over the last few years exposure to the industrial sector (20.7% as of
Derivation Summary
SRC's portfolio metrics, including weighted average lease term, occupancy, leverage is consistent with peers in the 'BBB' category. Fitch's expectations of leverage sustaining in the mid-5x range are similar to triple net lease peer
SRC's has greater investment-grade tenant exposure (20% of 3Q22 ABR) as compared to STOR's focus on middle market tenants. Exposure to industrial assets, which Fitch views favorably, is comparable between SRC (21%) and STOR (21%). SRC's access to capital is stronger than peers
Fitch rates the IDRs of the parent REIT and subsidiary operating partnership on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties. Fitch applies 50% equity credit to the company's perpetual preferred securities given the cumulative nature of coupon deferral. The instruments are subordinated to debt, lack material covenants and the terms of the change of control do not negate the equity credit judgement. Certain metrics calculate leverage including preferred stock.
Key Assumptions
Mid-single digits SSNOI throughout the ratings forecast, bolstered by 2% rent escalators and consistent high occupancy;
Acquisitions made at a 7% cap rate in 2023 consistent with management expectations;
Dispositions made at a low to mid-5% cap rate consistent with historical disposition rates;
SRC manages its acquisitions, debt issuance, and equity issuance to keep REIT leverage within the 5x-6x range;
REIT FCC remains above 4.0x through the ratings forecast;
UA/UD remains above 2.0x through the ratings forecast.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of leverage (as measured by net debt before preferred stock/EBITDA) sustaining below 5.0x;
Stable operating performance and track record, including maintaining occupancy levels and consistent tenant performance;
Fitch's expectation of FCC sustaining above 3.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of leverage sustaining above 6.0x;
Sustained deterioration in operating fundamentals or asset quality;
Fitch's expectation of FCC sustaining below 3.0x;
UA/UD sustaining below 2.0x and/or deterioration in the quality, value and/or ability to finance the unencumbered pool.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
As of
SRC has ample liquidity with proforma liquidity coverage through fiscal YE 2024 at roughly 5.9x, pro forma for its November term loan and anticipated 4Q22 acquisition activity. The company is aided in this liquidity calculation by very few short to medium term debt maturities; the nearest material maturities are
Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities, and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex, and forecast (re)development costs.
Issuer Profile
As of
Summary of Financial Adjustments
No material non-standard financial adjustments. Stock based compensation was considered a reduction to SG&A and an addback to EBITDA.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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