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Rating Action:

Moody's upgrades Spirit to Baa2, outlook stable

29 Oct 2021

New York, October 29, 2021 -- Moody's Investors Service ("Moody's") has upgraded the ratings of Spirit Realty Capital, Inc, including the senior unsecured ratings of its main operating subsidiary, Spirit Realty L.P, to Baa2 from Baa3. The ratings outlook is stable. The rating upgrade reflects the REIT's modest leverage, mostly unencumbered property portfolio, and its large and growing portfolio of high-quality assets supported by long-term triple net leases that drive stability of cash flows. The REIT's ratings are also supported by its sound capital structure and strong liquidity. The stable outlook reflects Moody's expectation that Spirit's core portfolio will continue to generate stable earnings as the REIT seeks growth on a leverage neutral basis. The outlook also reflects our expectation that the REIT will maintain its conservative financial profile, while executing its strategic growth plans to enhance asset quality and scale.

The following ratings were upgraded:

Issuer: Spirit Realty, L.P.

- Backed senior unsecured to Baa2 from Baa3

- Backed senior unsecured shelf to (P)Baa2 from (P)Baa3

Issuer: Spirit Realty Capital, Inc

- Preferred stock to Baa3 from Ba1

- Preferred stock shelf to (P)Baa3 from (P)Ba1

Outlook Actions:

Issuer: Spirit Realty, L.P.

- Outlook, changed to stable from positive

Issuer: Spirit Realty Capital, Inc

- Outlook, changed to stable from positive

RATINGS RATIONALE

Spirit's Baa2 senior unsecured rating reflects its high portfolio occupancy and history of stable cash flows derived from long-term, triple-net leases. The REIT's portfolio is large and well diversified by tenant, industry and geography. Spirit also benefits from modest leverage, minimal secured debt and a largely unencumbered property portfolio. The REIT adheres to a consistent financial policy that includes public leverage targets and maintains an adequate liquidity profile as it executes strategic growth. We also note that Spirit has overhauled its asset management and underwriting investment platform in recent years, with critical upgrades that have improved the predictability of its earnings through market cycles. To that end, the REIT has focused on net lease acquisitions in retail (~75% of ABR) and industrial (~18%), and lifestyle related industries and expects to acquire $800 million - $1 billion for the full year 2021 on a net basis. Further, the strength of its platform and tenant credit profiles is evidenced by high rent collection rates through the pandemic, which has led to de minimis permanent rent loss, and improved overall tenant health.

Key challenges include Spirit's exposure to industries that faced disruption from the coronavirus pandemic and remain in a recovery phase, including health and fitness (7.7%), casual dining and QSRs (11.4%), movie theaters (4.2%) and entertainment venues (3.3%), some of which were already facing existing secular headwinds. Spirit's portfolio also has a high proportion of middle-market tenants that generally have a higher risk profile, although about 54% are public tenants, improved from 49% in 2019, and 23.6% are investment grade rated (or the parent thereof).

Spirit's liquidity is considered adequate against its upcoming funding needs, which consist primarily of acquisitions, its dividend, and modest capex. As of June 30, 2021, the REIT had approximately $0.9 billion of liquidity including $787 million available on unsecured revolver, roughly $80 million in unsettled equity forward contracts, and $9 million in cash. Upcoming maturities include the revolver ($13 million outstanding) in 2023, followed by no meaningful corporate maturities before 2026 when $300 million of unsecured notes come due. We expect that Spirit will continue to fund new investments on a leverage neutral basis at a minimum with a mix of long-term unsecured debt and common equity.

The stable outlook reflects Moody's expectation that Spirit's core portfolio will continue to generate stable earnings as the REIT seeks growth on a leverage neutral basis. The outlook also reflects our expectation that the REIT will maintain its conservative financial profile, while executing its strategic growth plans to enhance asset quality and scale.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward ratings movement would likely reflect execution of strategic growth that enhances overall asset quality and earnings stability, while maintaining strong capital markets access. An upgrade would also reflect Net Debt/EBITDA in the low 5x range and fixed charge coverage above 4.0x on a sustained basis. Maintenance of strong credit trends and stable cash flows from the core portfolio would also be needed for an upgrade.

Spirit's ratings would likely be downgraded if Net Debt/EBITDA were to exceed 6.0x on a sustained basis, with fixed charge coverage below 3.0x. Secured debt above 10% of gross assets or diminished financial flexibility would also result in a ratings downgrade.

Spirit Realty Capital, Inc [NYSE: SRC] is a net-lease real estate investment trust (REIT) that invests in and manages a portfolio primarily of single-tenant, operationally essential real estate throughout the United States. As of June 30, 2021, the REIT had gross assets of $7.6 billion.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1272320. 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Lori Marks
VP - Senior Credit Officer
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

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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