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Fitch Affirms VEREIT's IDR at 'BBB'; Outlook Stable

· 03/17/2021 08:11
Fitch Affirms VEREIT's IDR at 'BBB'; Outlook Stable

(The following statement was released by the rating agency)

Fitch Ratings-New York-17 March 2021:

Fitch Ratings has affirmed VEREIT, Inc.'s (VER) Long-Term Issuer Default Rating (IDR) at 'BBB', and VEREIT Operating Partnership, L.P.'s Long-Term IDR and underlying issuances outstanding at 'BBB'. The Rating Outlooks for the long-term ratings is Stable.

The affirmations and Stable Outlooks reflect Fitch's expectations that the company will sustain metrics appropriate for the rating, including leverage (net debt/recurring operating EBITDA) below 6.0x and an Unencumbered Asset/Unsecured Debt ratio (UA/UD) at or above 2.0x, and maintain stable operating performance over the long term (e.g. sustained positive SSNOI results and/or corporate earnings growth).


Key Rating Drivers

Strong Credit Profile: Fitch expects leverage to sustain in the mid-5x range through the forecast period, as portfolio occupancy maintains in the 97% to 98% range, and releasing spreads stabilize. Acquisitions will be financed with a mix of cash on hand at YE 2020, dispositions proceeds, equity issuance and unsecured bond offerings. VER increased liquidity in the latter half of 2020, issuing $1.8 billion in bonds and approximately $480 million in equity. As of YE 2020, the firm had full availability under its $1.5 billion revolving credit facility and $524 million in cash. The firm does not have any unsecured bond maturities until 2024.

Rent Collections Fully Recovered: Fitch expects VER's collection rate to sustain in the high 90% range, having fully recovered from the sharp drop to the mid-80% range during 2Q20. VER collected 99% of January 2021 rents, a marked improvement from 87% during 2Q20. Most notable, collections in the Restaurants - Casual Dining, Entertainment & Recreation and Home Furnishings segments of the portfolio improved from 40%, 29% and 38% during 2Q20 to 98%, 87% and 100%, respectively during January 2021. Deferred rent totaled $17.9 million in 2020. The firm collected all deferred rent due in 4Q20 totaling $6.2 million, and Fitch expects VER to collect the vast majority of deferred rents due in 2021 ($11.7 million) and 2022 ($98,000), respectively.

Granular Portfolio Aids Stability: VER's granular portfolio should result in above average cash flow stability during the one-to-two year Rating Outlook horizon. Fitch expects portfolio granularity to increase during the forecast period as acquisition spend exceeds dispositions. As of Dec. 31, 2020, VER's portfolio consisted of single tenant retail, restaurant, office, and industrial real estate assets, comprising approximately 3,800 properties with a gross book value of approximately $14.6 billion. The portfolio's economic occupancy was 98.1% with a weighted average lease term (WALT) of 8.4 years, lower than Fitch net lease peer WALT of approximately 10 years, due largely to the office and industrial asset type diversification. The company's portfolio has built in rent escalations on approximately 80% of leases, which generate predictable cash flows, absent tenant bankruptcies and lease rejections.

More Industrial and Retail; Less Office: Portfolio Repositioning: Fitch anticipates the company will acquire retail, quick-service restaurants (QSR) and industrial assets and sell office, and flat lease assets as market conditions allow. The company has disposed of more than $5 billion in assets since 2015, reducing Red Lobster tenant concentration to 4.8% of 4Q20 revenues from 11.9% in 2Q15 and office exposure to 16.5% from 22.7%.

Improved Capital Markets Activity: During 2020, VER issued $1.8 billion in unsecured bonds to redeem a higher cost unsecured bond issuance, $900 million term loan and a portion of its series F preferred stock. Additionally, VER raised approximately $480 million in proceeds via common equity issuance. VER's class action lawsuit was a significant overhang on its liquidity profile and capital access. VER's absolute size and issuance frequency will support its capital markets' presence now that the legal overhang has been resolved.

Industry Exposure Risk: The portfolio's largest tenant industry exposure is restaurants at 20.5% of ABR; casual dining 12.0%; quick service restaurants (QSR) 8.5%, and includes its largest tenant, Red Lobster, at 4.8% of ABR. Fitch expects QSRs to continue outperforming their casual dining peers through at least 1H21. Additionally, VER's exposure to QSRs is expected to grow during the forecast period as acquisitions of QSRs exceed dispositions.

Casual dining restaurants are highly reliant on dine-in revenue and have experienced greater negative performance impacts compared to quick service amid a pandemic, particularly in scenarios where transitioning to take-out and delivery services has also been challenging.

Positively, VER's weighted-average rent coverage within its combined retail and restaurant segment was 2.4x for 4Q20, which indicates a buffer to withstand at least a short-term standstill.

VER's other major exposures include manufacturing (9.0%), discount retailers (8.3%), and pharmacies (6.3%). Investment-grade tenants are responsible for 38.7% of VER's ABR. VER's portfolio is well-diversified by location; the largest geographic concentrations by MSA include Chicago (5.0% of ABR), Dallas (3.8%) and Atlanta (2.3%).

Solid Unencumbered Asset Coverage: As of Dec. 31, 2020, VER's unencumbered assets (defined as unencumbered NOI divided by a stressed 9% capitalization rate) covered net unsecured debt by 2.0x, which is appropriate for the 'BBB' rating. 4Q20 unencumbered NOI of $208 million represents 82% of total NOI ($255 million).


Derivation Summary

VER owns and operates a large and granular portfolio of net lease properties widely diversified by industry and geography throughout the U.S. The company's portfolio has more non-retail (office, industrial) exposure than its Fitch-rated net lease counterparts, at an estimated 34% of 4Q20 ABR. This results in a WALT of 8.4 years, which is lower than the peer average of approximately 10 years. The company has been actively reducing its consolidated office exposure to limit capex costs, but exposure is expected to remain materially higher versus peers, including National Retail Properties (BBB+/Stable), STORE Capital Corp. (BBB/Stable) and Spirit Realty Capital (BBB/Stable). VER's investment-grade tenant exposure at 39% of total ABR compares favorably with peers.

VER's credit metrics, including leverage expected to sustain in the mid-5x range and UA/UD in the low-2x range, compare well with STORE and Spirit. National Retail is expected to sustain leverage in the low-5x range. VER is expected to demonstrate better capital access following the resolution of its class action litigation. In addition, positive rating momentum would be contingent on access improving to levels consistent with higher rated peers and 'BBB+' rated REITs generally.


Key Assumptions

--Same-store NOI is flat in fiscal 2021, followed by 0.5% and 1.1% growth in fiscal 2022 and fiscal 2023, respectively;

--Net acquisitions of $1.0 billion in 2021 and $500 million per year during the remainder of the forecast period;

--Fitch assumes equity issuance of $550 million in fiscal 2021, followed by $200 million per annum in forecast model to fund acquisitions;

--$400 million bond issuance in 2022 and $1.3 billion in issuance during 2024. VER will continue unencumbering its portfolio as mortgages mature.


RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Fitch's expectation of net debt, excluding preferred stock, to recurring GAAP operating EBITDA sustaining below 5.0x;

--Fitch's expectation of FCC sustaining above 3.5x;

--Demonstration of improved capital access, including unsecured debt capital, on par with 'BBB+' rated REIT issuers;

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Fitch's expectation of net debt, excluding preferred stock, to recurring GAAP operating EBITDA sustaining above 6.0x;

--Fitch's expectation of FCC sustaining below 2.5x;

--Fitch's expectation of the ratio of unencumbered assets to unsecured debt (UA/UD) sustaining below 2.0x at a 9% stressed cap rate 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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.


Liquidity and Debt Structure

Strong Liquidity: Fitch estimates VER's base case liquidity coverage at 3.8x through YE 2022, which is adequate for the rating. As of Dec. 31 2020, VER had $524 million in cash and full capacity available under its $1.5 billion revolver. Fitch believes the revolver provides a meaningful buffer for any extended dislocation in capital markets activity. VER has been actively unencumbering its portfolio as secured mortgages come due. Secured mortgage debt accounted for 22% of VER's debt structure at YE 2020, down from 41% in 2016.

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.


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.

VEREIT Operating Partnership, L.P.; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable
----senior unsecured; Long Term Rating; Affirmed; BBB
VEREIT, Inc.; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable
----preferred; Long Term Rating; Affirmed; BB+

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Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

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