PRESS RELEASE: S&P Rates Realty Income's New $250M Senior Unsecured Nts 'BBB'

25th Jun 2010 17:38

The following is a press release from Standard & Poor's: OVERVIEW -- Realty Income has announced plans to acquire $269 million of winery and vineyard properties under long-term triple-net-lease agreements with Diageo Chateau & Estate Wines (guaranteed by Diageo PLC) in a debt-financed transaction. -- The planned acquisition does not affect our 'BBB' corporate credit and unsecured debt ratings on Realty Income or our 'BB+' ratings on Realty Income's preferred stock. -- We assigned a 'BBB' rating to the company's new $250 million 5.75% unsecured debt due 2021. -- Our ratings and stable outlook on Realty Income acknowledge the company's good financial profile. The company's still moderately leveraged balance sheet, diversified portfolio, and historically prudent underwriting collectively support our expectation for continued stable cash flow and strong debt service coverage measures. NEW YORK (Standard & Poor's) June 25, 2010--Standard & Poor's Ratings Services today assigned a 'BBB' rating to Realty Income Corp.'s new $250 million 5.75% senior unsecured notes due 2021. The company intends to use proceeds to fund the majority of its recently announced agreement to acquire roughly $269 million of winery and vineyard properties throughout the Napa Valley in Napa County, Calif., under long-term (20-year) triple-net lease agreements. The tenant is Diageo Wines & Estate Company, and the lease is guaranteed by Diageo PLC (A-/Stable/A-2). The tenant will become Realty Income's second-largest tenant (behind LA Fitness) and will contribute 5.7% of the company's revenue. The properties consist of approximately 2,000 acres of vineyard properties, as well as the winery, production, retail, and visitor center buildings of both the Sterling Vineyards winery and the Beaulieu Vineyards winery, with combined leasable space of approximately 400,000 square feet. Diageo Chateau & Estate Wines will continue to manage and operate the properties and will retain ownership and marketing of its wine brands under this transaction. Despite Realty Income's use of debt to finance the planned acquisition, the company's balance sheet will remain moderately leveraged, and the company faces no debt maturities until 2013. We expect debt-to-undepreciated book capitalization will rise to roughly 44% (from 40% at March 31, 2010) once the acquisition closes, which is planned for the second quarter of 2010. The company's debt tenor will remain favorably long-term (with a roughly 10-year weighted average maturity) and well-balanced, in our view, against Realty Income's roughly 11-year weighted average remaining lease term. This transaction marks the company's initial investment in vineyards and wineries. While we generally consider this business sector to be subject to high cash flow volatility, the credit quality of guarantor Diageo PLC and the triple-net-lease structure of this transaction serve to insulate Realty Income's rental cash flow from potential volatility in operating cash flow at the property level, in our view. Additionally, we believe Realty Income's currently good liquidity defensively positions the company to withstand potential tenant stress until consumer spending and the broader economy return to firmer footing. We expect the company to finance any additional acquisitions with equity to return leverage to the low-40% area over the next few years. RELATED CRITERIA AND RESEARCH -- "With Liquidity Improved, Equity REITs Shift Focus To Declining Fundamentals And Growth Opportunities," published Feb. 11, 2010. -- "Corporate Ratings Criteria 2008," published April 15, 2008. -- "Rating Criteria for U.S. REITs and REOCs," published May 6, 2004. RATING LIST Realty Income Corp. Rating Corporate credit BBB/Stable/-- RATING ASSIGNED Realty Income Corp. Rating $250 million 5.75% senior notes due 2021 BBB OTHER OUTSTANDING RATING Realty Income Corp. Rating Preferred stock BB+ Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. 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