Fitch Ratings has placed the 'BBB' Long-Term Issuer Default Rating (IDR) and 'BB+' preferred rating of
The Rating Watch Positive is driven by
Key Rating Drivers
The following Key Rating Drivers were published pursuant to Fitch's most recent annual rating review on
Strong Asset Quality: SRC's operational performance returned to pre-COVID levels with occupancy and collections at 99.8% as of
Well Balanced Portfolio Diversification: As of
Fitch also views favorably the growing percentage of industrial and manufacturing assets (25.7% of ABR; up from 14.9% as of
Investment-Grade Credit Metrics: Fitch expects SRC's REIT 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 (25.7% as of
Derivation Summary
SRC's portfolio metrics, including weighted average lease term, occupancy, leverage is consistent with peers in the 'BBB' category.
Fitch 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
The aforementioned acquisition is completed in 1Q24.
If the acquisition is not completed, the following key assumptions would apply to SRC as a standalone business:
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 expects the Rating Watch will be resolved with a positive rating action if the transaction is consummated as proposed. As part of the resolution, Fitch will endeavor to understand the combined entity's pro forma capital structure, financial policy, and structure, including but not limited to the relationship of subsidiaries to the parent.
If the acquisition is not completed, the following rating sensitivities would apply to SRC as a standalone business:
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.
Liquidity and Debt Structure
As of
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
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.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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