S&P Upgrades Spirit Realty Capital (SRC) to 'BBB-'; Outlook Remains Stable

Standard & Poor's Ratings Services raised its corporate credit rating on Spirit Realty Capital Inc. (NYSE: SRC) to 'BBB-' from 'BB+'. The outlook is stable.

"The upgrade primarily reflects Spirit's recently upsized equity issuance (which resulted in net proceeds after fees of $369 million), which modestly lowered leverage and is also expected to accelerate the pace of unencumbering the company's asset base. We now project Spirit's unencumbered real estate assets will be at or slightly above 50% of gross real estate assets by year-end 2016, up from approximately 47% prior to the equity issuance," said credit analyst Michael Souers. "While the company will initially use proceeds from the equity issuance to repay the term loan and for approximately $190 million of acquisitions currently in the pipeline. We also expect Spirit to pre-pay some 2016 and 2017 mortgages to accelerate the unencumbering of its portfolio."

The stable outlook reflects our view that the company's same-store portfolio will perform steadily and that a fairly aggressive appetite for investment growth will continue to be funded primarily with asset sales and equity issuance. We project debt to EBITDA will decline to the mid- to low-6x area, with FCC rising to the high-2x area over the next 12 to 18 months.

While unlikely over the next two years, we could raise the rating by one notch if the company prudently grows its scale while further diversifying its tenant base. Moreover, we would like to see the financial metrics improve such that debt to EBITDA is sustained below 6x, with FCC rising to the low-3x area. In addition, we would also need to see the company continue to unencumber its asset base, providing additional financial flexibility to Spirit's balance sheet.

While also unlikely over the forecast period, we could lower the rating by one notch if the company's operating performance weakens materially, potentially caused by a recession that leads to numerous tenant defaults and vacancies. In addition, a downgrade could occur if Spirit acquires properties with more debt financing than we expect, such that debt to EBITDA rises back above 7.0x of FCC falls back below 2.3x on a sustained basis.

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