Approximately $300 million of securities affected.
New York, August 12, 2020 -- Moody's Investors Service (Moody's) has affirmed Agree Realty Corporation's
(ADC) Baa2 issuer rating. In the same rating action, the
rating agency also assigned a (P)Baa2 rating to Agree Limited Partnership's
senior unsecured shelf and a Baa2 rating to its inaugural senior unsecured
bond issuance, which is currently being marketed. Additionally,
the rating outlook for ADC was revised to positive from stable.
The affirmation and assignment reflect ADC's solid credit profile,
supported by its low leveraged balance sheet and flexible capital structure
with a resilient operating portfolio that is largely unencumbered.
The REIT's liquidity position continues to be reinforced by its
activities in the equity capital markets, allowing the firm to fund
its ambitious property acquisition plans and meet its minimal near-term
debt maturities and modest development commitments. In light of
the challenged operating environment impacted by COVID-19,
the net lease company is defensively positioned to withstand short-term
credit pressure.
Assignments:
..Issuer: Agree Limited Partnership
....Senior Unsecured Regular Bond/Debenture
(Local Currency), Assigned Baa2
....Senior Unsecured Shelf (Local Currency),
Assigned (P)Baa2
Affirmations:
..Issuer: Agree Realty Corporation
.... Issuer Rating (Local Currency),
Affirmed Baa2
Outlook Actions:
..Issuer: Agree Realty Corporation
....Outlook, Changed To Positive From
Stable
..Issuer: Agree Limited Partnership
....Positive Outlook Assigned
RATINGS RATIONALE
Agree Realty's strong and low leveraged balance sheet, ample
liquidity, and good financial flexibility support its growth plans
while also meeting its minimal near-term obligations. To
date, ADC's sculpted retail portfolio remains resilient, operating
at near full occupancy and with some of the highest reported rent collection
rates in the net lease sector for second quarter 2020 at 91% and
for July 2020 at 95%, as of August 7th, with minimal
rent deferrals of approximately 3%. The largely unencumbered
and predominantly triple net lease portfolio benefits from a high exposure
to strong national and regional retailers with minimal near-term
lease expirations. Management remains selective in its long-term
relationships with retailers that tend to have public investment-grade
ratings, resilient omnichannel platforms and other defenses against
e-commerce. The enhanced portfolio is also benefitting from
a reduced exposure to nonessential businesses or to businesses that rely
heavily upon social gathering, which have thus far protected the
firm against temporary business interruptions (store closures) and declines
in discretionary consumer spending. ADC's strengthened credit
profile has been bolstered by its frequent activity in the equity capital
markets, reducing leverage on a pro forma basis, and boosting
its liquidity position to support leverage-neutral acquisitions.
Year-to-date through Q2 2020, the company has completed
$500 million in gross property acquisitions against its guidance
of $900 million to $1.1 billion, and intends
to sell between $50 million to $75 million of assets.
For the first half of 2020, adjusted funds from operations grew
7.6% year-over-year driven by a combination
of new property acquisitions and some rent escalations.
After Moody's adjustments for operating lease liabilities and accounting
for only unrestricted cash, last 12-month (LTM) net debt
to EBITDA for Q2 2020 was 4.1x and approximately 1.9x,
on a pro-forma basis for anticipated settlements of the equity
forward contracts before the end of Q2 2021. Effective leverage
(total debt + preferred stock as a percentage of gross assets) for
the same period was approximately 25%. Secured debt levels
remain low at just 1% of gross assets, with a total of $34
million in property-level mortgages. The REIT's financial
flexibility is supported by a near-fully unencumbered asset base
at 98% of gross assets and a fixed charge coverage ratio consistently
above 4.0x, providing a buffer against unexpected cash flow
decline.
Apart from the downside risk stemming from the challenged operating environment
as well as the threat of new infection rates, the REIT's credit
constraints include its smaller gross asset size, although rapidly
growing, and key person risk in its executive leadership.
There is some tenant concentration with Walmart Inc. (Aa2 stable),
representing 7.6% of annual base rent (ABR), however,
this is substantially mitigated by the tenant's strong franchise
as the largest retailer in the world.
The positive rating outlook incorporates our expectation that ADC will
maintain discipline over its leverage and liquidity profile, while
continuing its accretive growth plans on a leverage-neutral basis.
The outlook also incorporates the REIT's maintenance of the portfolio's
improved quality, diversification, and current operational
performance at a minimum. In addition, it is expected that
the company will continue to deepen its access to the public debt capital
markets as part of its long-term, unsecured borrowing strategy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating movement would be predicated on the REIT achieving the following
on a consistent basis: 1) maintenance of portfolio and recurring
earnings growth trajectory on a leverage neutral basis; 2) total
debt plus preferred stock below 35% of gross assets; 3) LTM
net debt to EBITDA (Moody's adjusted) below 5.5x; 4) fixed
charge coverage ratio above 4.0x; and 5) maintenance of portfolio
granularity such that top tenant sector and top state concentration each
remain less than 10% of ABR.
In light of the positive outlook, a downgrade is unlikely in the
next 12 months, however, due to the ongoing unpredictable
effects and uncertainty from the current pandemic, a return to stable
outlook or downward rating pressure is possible. This would result
from a deterioration in the credit profile such that the following occurs
on a consistent basis: 1) failure or inability to complete its planned
acquisitions; 2) total debt plus preferred stock approaching 40%
of gross assets; 3) LTM net debt to EBITDA (Moody's adjusted) approaching
6.0x; 4) fixed charge coverage ratio approaching 3.5x;
4) secured debt levels exceed 10% of gross assets or the unencumbered
asset pool decreases below 80%; and 5) a deterioration in
the portfolio's occupancy levels and EBITDA margins. Additionally,
the portfolio's top tenant accounting for more than 10% of
ABR, and the top tenant sector and top state concentration approaching
15% of ABR.
Headquartered in Bloomfield Hills, Michigan, Agree Realty
Corp. [NYSE: ADC] is a fully integrated, self-managed
REIT that owns, acquires, and develops freestanding single-tenant
properties that are net leased to leading US national and super-regional
retail companies. As of June 30, 2020, the REIT wholly-owned
936 properties, totaling 18.4 million square feet (SF) of
gross leasable area (GLA), located across 46 states.
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 DISCLOSURES
For 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_1133569.
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.
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
AVP-Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Philip Kibel
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
