-- Spirit Realty Capital Inc. recently completed an IPO of common
-- Spirit used proceeds from the IPO to repay a portion of its
outstanding term loan and extinguished the remainder of the term loan through
a conversion into common shares.
-- As a result of these transactions, we are raising the corporate credit
rating on Spirit to 'B' from 'CCC+' and withdrawing our ratings on the
company's term loan (a '4' recovery rating and 'CCC+' senior secured rating).
On Oct. 5, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on Spirit Realty Capital Inc. (Spirit) to 'B' from 'CCC+' and
revised our outlook on the company to stable from developing. We also withdrew
our rating on the company's senior secured term loan after the company repaid
and extinguished it.
The upgrade reflects Spirit Realty Capital Inc.'s successful completion of an
initial public offering (IPO) of its common stock, which raised $465 million
of net proceeds. The company also completed related contingent deleveraging
transactions, as it detailed in S-11 filings. Specifically, Spirit retired a
$729 million term loan outstanding that was due to mature in August 2013. The
term loan consisted of two tranches: term loan B ($399 million), which Spirit
repaid with IPO proceeds, and term loan C ($330 million), which Spirit
extinguished and converted into shares of its common stock. The IPO reduced
leverage; however, low debt coverage metrics contribute to our view of the
company's financial risk profile as "aggressive." We consider the company's
liquidity "adequate", despite a high dividend payout ratio, as liquidity is
bolstered with the addition of access to a revolving credit facility ($100
million). 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 to
consider Spirit's business profile "weak."
Spirit is a publicly traded REIT that focuses on the ownership of
triple-net-leased retail properties under long-term leases (average remaining
lease term 11.4 years). Spirit's balance sheet included $3.6 billion in gross
investments 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 is
secured). The company owned or financed 1,183 properties (1,096 owned) in 47
states. Spirit leases the properties in its owned portfolio to approximately
165 tenants in 18 different industry sectors, including general, specialty and
discount retail; movie theaters; automotive dealers; educational and
recreational facilities; supermarkets, and restaurants.
Portfolio occupancy remained high at 98.2% as of June 30, 2012, partly
reflecting the company's strategy of selling or re-leasing properties that
become vacant. However, Spirit's tenant base is highly concentrated. Following
the February 2012 merger between ShopKo Stores Operating Co. LLC (not rated)
and Pamida Stores Operating Co. LLC (not rated), the combined company
constitutes 30.2% of Spirit's revenues. Property-level rent coverage for the
Shopko/Pamida stores in Spirit's portfolio was over 2x at June 30, somewhat
mitigating the concentration risk.
Pro forma for the IPO, we believe that Spirit's debt service coverage improves
to the mid-1x area and leverage declines to roughly 60% on a book basis, but
dividend coverage has little downside cushion. Under our base-case scenario,
we assume that modest contractual rent increases offset potential rental
losses due to stress among a few of the company's smaller tenants. We also
assume the company reduces leverage modestly over time by meeting regularly
scheduled principal amortization of its secured debt through operating cash
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 be
more 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) for
the remainder of 2012 and roughly $48 million for the full year 2013.
-- Spirit also faces roughly $106 million of annual common dividends and
modest (less than $10 million) portfolio related capital expenses.
We expect Spirit will fund these obligations with cash on hand ($104 million
at June 30, 2012, pro forma for the IPO), operating cash flow of roughly $125
million for the next four quarters, and its new secured revolving credit
facility ($100 million, due Sept. 25, 2015, and subject to a one-year
extension at the company's option). One of the covenants governing Spirit's
revolving credit facility requires the company to maintain a minimum
unencumbered asset base of 1.75x outstanding commitments.
The outlook is stable. The company materially reduced balance-sheet leverage
through a recent IPO and related term loan repayment/conversion transaction.
Despite our expectation for stability in portfolio occupancy, rents, and cash
flows over the next 12 months, the timeframe of our outlook, we would likely
lower the rating if the company's liquidity becomes constrained or debt
coverage measures deteriorate, perhaps due to tenant challenges. The high
dividend payout ratio and highly concentrated tenant base contribute to our
view that an additional upgrade is unlikely in the next year.
Related Criteria And Research
-- Issuer Ranking: North American REITs, Strongest To Weakest, July 26,
-- Takeaways From The 2012 ICSC Convention: The Mood Among Retail
Landlords Is Cautiously Optimistic, June 14, 2012
-- Industry Report Card: Improvements In Operating Fundamentals Bode Well
For North American REITs, May 4, 2012
-- General Criteria: Methodology And Assumptions: Liquidity Descriptors
For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies,
June 21, 2011
Ratings Raised; Outlook Revised
Spirit Realty Capital Inc. B/Stable/-- CCC+/Developing/--
Spirit Realty Capital Inc.
Senior Secured NR CCC+
Recovery Rating NR 4
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left