Fitch Affirms Realty Income's IDR At 'BBB+'; Outlook Stable

Business Wire,  June 24, 2008  

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NEW YORK -- Fitch Ratings has affirmed the Issuer Default Rating (IDR) and outstanding credit ratings of Realty Income Corporation (NYSE:O) as follows:

--IDR at 'BBB+';

--$1.5 billion of senior unsecured notes at 'BBB+';

--$355 million unsecured revolving credit facility at 'BBB+';

--$345.5 million of preferred stock at 'BBB'.

The Rating Outlook is Stable.

The rating affirmations center on Realty Income's highly diversified unencumbered portfolio of freestanding retail assets and the company's solid liquidity position, providing ample downside protection to unsecured bondholders and preferred stockholders.

As of March 31, 2008, Realty Income owned 2,375 properties, located in 49 states, containing over 19.2 million leaseable square feet. In addition, as of March 31, 2008, the portfolio was leased to 119 different retail chains in 30 separate retail industries. These characteristics insulate Realty Income from potential negative trends within particular retail markets or geographical segments in the broader economy. Additional positive characteristics with respect to the portfolio include the long-term nature of Realty Income's net leases, thus providing predictable cash flows, and the fact that the portfolio is entirely unencumbered, enabling a high degree of financial flexibility, particularly with respect to capital recycling and contingent liquidity.

The ratings further reflect Realty Income's liquidity profile. Historically, Realty Income's funds from operations payout ratios and line of credit utilization have been judicious. Moreover, in May 2008, the company entered into a credit agreement that replaced the company's $300 million acquisition credit facility, which was unused as of March 31, 2008. The recent agreement provides for a $355 million unsecured revolving credit facility maturing May 13, 2011, which gives the company further financial flexibility for ongoing business operations and acquisitions.

Major credit concerns include a weakening of certain credit metrics following the September 2007 issuance of $550 million of 6.75% 12-year notes due 2019. While Fitch notes that the transaction was met with high demand during the early stages of dislocations of the credit markets, the issuance resulted in increased leverage ratios, lower risk-adjusted capitalization, and somewhat lower fixed charge coverage ratios.

Realty Income's debt-to-undepreciated book capital ratio was 31.8% as of Dec. 31, 2006 and subsequently increased to 42.3% as of Dec. 31, 2007. As of March 31, 2008, debt-to-undepreciated book capital was 42.2%. Likewise, Realty Income's risk-adjusted capital ratio declined from 1.8x at Dec. 31, 2006, to 1.6x at Dec. 31, 2007 and 1.5x at March 31, 2008. As Realty Income deployed cash from the 6.75% 12-year notes transaction in a measured pace, earnings associated with new property acquisitions incrementally increased EBITDA. However, the increase in interest expense associated with the 12-year notes has resulted in modestly declining fixed charge coverage ratios. Fixed charge coverage was 3.3x in 2005 and 2006, 3.0x in 2007 and 2.5x in the quarter ended March 31, 2008. Leverage, risk-adjusted capitalization, and fixed charge coverage, though weaker, remain adequate for the 'BBB+' rating level.

Fitch additionally notes the fact that in January 2008, one of Realty Income's tenants, Buffets Holdings, together with each of its subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the U. S. Bankruptcy Code. However, Realty Income has been able to navigate well through previous tenant bankruptcy situations.

The Stable Outlook reflects the operational track record of the company's management team with respect to same-store rental growth and consistently strong occupancy levels, even during periods of weak consumer demand. Going forward, credit metrics such as unencumbered asset coverage and total leverage are expected to remain stable. In addition, debt maturities are limited in the coming years, and capital recycling activities are expected to remain measured.

Realty Income Corporation, which brands itself as 'The Monthly Dividend Company', is an equity real estate investment trust (REIT) based in Escondido, California. Since 1969, Realty Income and its predecessors have acquired and owned freestanding retail properties that generate rental revenue under long-term net-lease agreements. As of March 31, 2008, Realty Income had $3.5 billion in undepreciated book assets, $1.6 billion in undepreciated book equity and a total market capitalization of $4.4 billion.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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