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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings assigns a credit rating of 'BBB-' to the $325 million 6.625% series F cumulative redeemable preferred stock issued by Realty Income Corporation (NYSE: O). Net proceeds from the offering are expected to be used to redeem all outstanding shares of the company's $127.5 million of 7.375% class D preferred stock and repay a portion of the borrowings outstanding under the company's $425 million unsecured credit facility. On Jan. 27, 2012, Realty Income had approximately $257.1 million of outstanding borrowings under this facility.

Fitch currently rates the company as follows:

--Issuer Default Rating (IDR) 'BBB+';

--$425 million unsecured revolving credit facility 'BBB+';

--$1.75 billion senior unsecured notes 'BBB';

--$524.8 million preferred stock 'BBB-'.

The Rating Outlook is Stable.

The 'BBB+' IDR takes into account Realty Income's good operating performance from its predominantly triple-net leased freestanding retail property portfolio despite recent tenant bankruptcy announcements by Friendly's Ice Cream (3.6% of annualized rent as of Sept. 30, 2011) and Buffets Holdings, Inc. (4.3% of annualized rent). Recent acquisitions should boost the company's earnings power and Fitch anticipates that fixed charge coverage will remain appropriate for the 'BBB+' rating despite additional potential tenant bankruptcies. The portfolio continues to benefit from long-term leases and to exhibit broad industry and geographical diversification. Separately, Realty Income's liquidity position remains solid.

Leverage recently increased due to debt-funded acquisition activity but remains appropriate for the 'BBB+' rating following the series F preferred stock transaction. In addition, while Realty Income has a limited track record investing in non-retail properties, Fitch views this segment as a mitigant to additional potential retailer bankruptcies.

The company's fixed charge coverage ratio (recurring operating EBITDA less recurring capital expenditures and straight-line rent adjustments divided by total interest incurred and preferred stock dividends) was 2.6 times (x) for the trailing 12 months (TTM) ended Sept. 30, 2011 pro forma for the series F preferred stock transaction and earnings from recent acquisitions, offset by tenant bankruptcy-related income reductions. Fitch anticipates that the Friendly's and Buffets bankruptcies will result in a decline of approximately $1.8 million and $6.4 million (35% of $18.2 million) of revenue, respectively. Coverage was 2.6x and 2.7x in 2010 and 2009, respectively.

Fitch's base case assumes that coverage will remain in the mid-to-high 2x range due to contractual rent bumps, offset by a potential erosion of up to 3% of rental income for 2012. In a more adverse case than anticipated by Fitch, coverage could fall below 2.5x which would be commensurate with a 'BBB' rating for a free-standing retail REIT.

Long-term leases result in cash flow predictability absent further material tenant bankruptcies. This trend of long-term leasing continued during 2011, as the company invested $1 billion in 164 properties that were fully-leased to 22 tenants at an initial yield of 7.8%. The average lease term for acquisitions in the first nine months of 2011 was 11.3 years.

Retailer industry segment risk is contained. As of Sept. 30, 2011, the company's portfolio included approximately 2,600 properties located in 49 states across 38 industries. Top industries were convenience stores (18.3% of rent), casual dining restaurants (10.9%), theaters (9.2%), quick service restaurants (6.4%) and health and fitness (6.1%).

Tenant exposure remains granular. During the third quarter of 2011 (3Q'11), the top 15 tenants had cash flow coverage of approximately 2.4x and top tenants were AMC Theatres (IDR of 'B' with a Negative Outlook at 5.4% of rent), Diageo (IDR of 'A-' with a Stable Outlook at 5%), L.A. Fitness (4.7%), Northern Tier Energy/Super America (4.5%) and Hometown Buffet (4.3%).

Liquidity is solid due to limited upcoming debt maturities and capital expenditures. Sources of liquidity (unrestricted cash, availability under the company's revolving credit facility, projected retained cash flows from operating activities) divided by uses of liquidity (debt maturities and projected capital expenditures) was 3.4x for Oct. 1, 2011 to Dec. 31, 2013. Pro forma for recent acquisitions and the series F preferred stock transaction, liquidity coverage remains solid at 3.6x for Oct. 1, 2011 to Dec. 31, 2013.

Fitch does not anticipate that recent acquisitions, bankruptcies and the series F preferred stock transaction will change dividend payout ratios meaningfully. Common dividends paid to shareholders divided by adjusted funds from operations was 87.2% for the nine months ended Sept. 30, 2011. Monthly dividend increases remain dependent on organic or acquisition-related growth and are incorporated into the 'BBB+' rating.

Near-term debt maturities are manageable. As of Sept. 30, 2011 and pro forma for recent acquisitions and the series F preferred stock transaction, the company's debt maturity schedule includes minimal maturities in 2012, 6.4% of total debt maturing in 2013 and 4.9% of total debt maturing in 2014.

Contingent liquidity is consistent with the 'BBB+' rating. Unencumbered assets (unencumbered NOI for the TTM ended June 30, 2011 divided by a stressed capitalization rate of 9%) covered unsecured debt by 2.2x. Pro forma for the Friendly's and Buffets bankruptcies, recent acquisitions funded with the revolving credit facility, and the series F preferred stock transaction, unencumbered asset coverage increases moderately to 2.3x.

Although leverage increased since Sept. 30, 2011 because of debt-funded acquisitions, the series F preferred stock transaction will reduce leverage as Realty Income used a portion of the proceeds to repay borrowings under the company's credit facility. Net debt to recurring operating EBITDA was 5.2x as of Sept. 30, 2011 pro forma for the series F preferred stock transaction, earnings from recent acquisitions and tenant bankruptcy-related income reductions. Leverage was 5.1x and 4.5x as of Dec. 31, 2010 and Dec. 31, 2009, respectively. Fitch anticipates that leverage will remain in the 5.0x to 5.5x range which would remain appropriate for the 'BBB+' rating. If leverage were to increase above 6.0x, such a level would be commensurate with a 'BBB' rating for a free-standing retail REIT.

While Realty Income has a limited track record investing in non-retail properties, this segment mitigates the potential impact of additional tenant bankruptcies. Realty Income's non-retail portfolio totaled 14.2% of revenues in 3Q'11, with top non-retail segments including agriculture (4.6%), distribution (3.2%) and manufacturing (2.3%). The company's 10-year strategic plan includes a goal to invest in new areas and resulted in the ECM portfolio acquisition in March 2011. Fitch views positively that the portfolio includes strong credit tenants such as Caterpillar (IDR of 'A' with a Stable Outlook) and Coca-Cola (IDR of 'A+' with a Stable Outlook).

The following factors may result in positive momentum on the ratings and/or Rating Outlook:

--If the company's fixed-charge coverage ratio sustains above 3.0x (as of Sept. 30, 2011 and pro forma for recent acquisitions, bankruptcies and the series F preferred stock, fixed charge coverage is 2.6x);

--If the company's leverage sustains below 4.0x (as of Sept. 30, 2011 and pro forma for recent acquisitions, bankruptcies and the series F preferred stock, leverage is 5.2x);

--If the company's unencumbered asset coverage of unsecured debt ratio sustains above 3.0x (as of Sept. 30, 2011 and pro forma for recent acquisitions, bankruptcies and the series F preferred stock, unencumbered asset coverage centered on 2.3x).

The following factors may result in negative momentum on the ratings and/or Rating Outlook:

--If the company's fixed-charge coverage ratio sustains below 2.5x;

--If the company's net debt to recurring operating EBITDA ratio sustains above 6.0x;

--Additional tenant bankruptcies resulting in a weakening of the company's credit metrics to levels noted above.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', Dec. 15, 2011;

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Recovery Rating and Notching Criteria for Equity REITs', May 12, 2011;

--'Criteria for Rating U.S. Equity REITs and REOCs', March 15, 2011.

Applicable Criteria and Related Research:

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

Recovery Rating and Notching Criteria for Equity REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]

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