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Fitch Affirms National Retail Properties' IDR at 'BBB'; Outlook Stable

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  Published in Business and Finance on Monday, January 24th 2011 at 14:00 GMT by Market Wire
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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the credit ratings of National Retail Properties, Inc. (NYSE: NNN) as follows:

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

--$400 million unsecured revolving credit facility at 'BBB';

--$600 million senior unsecured notes at 'BBB';

--$362 million senior unsecured convertible notes at 'BBB';

--Preferred stock at 'BB+'.

The Rating Outlook is Stable.

The rating affirmations center on NNN's solid credit metrics, which are appropriate for the 'BBB' IDR, as well as the company's diverse portfolio of net lease retail properties.

NNN's portfolio performance remains solid despite the challenging economic environment. In that vein, occupancy rose to 97.1% as of Sept. 30, 2010, from 96.3% as of Sept. 30, 2009. NNN's fixed-charge coverage ratio (defined as recurring operating EBITDA less recurring capital expenditures and straight-line rents, divided by total interest incurred and preferred stock distributions) was solid at 3.0 times (x) for the 12 months ended Sept. 30, 2010, down slightly from 3.1x for full-year 2009. Fitch expects fixed-charge coverage to remain relatively unchanged through 2012 due to long average lease terms, stable occupancy and fixed charges.

The ratings are further supported by NNN's diversified free-standing retail property portfolio consisting of 1,037 investment properties spread throughout 43 states, with the largest concentrations in Texas, Florida and Illinois. NNN's portfolio is comprised of over 275 tenants encompassing 34 industry classifications, thus limiting individual tenant credit risk.

NNN's leverage metrics are strong for the 'BBB' rating category. Net debt to last 12 months recurring operating EBITDA was 5.2x as of Sept. 30, 2010, up from 5.0x as of Dec. 31, 2009, but down from 5.4x as of Dec. 31, 2008. Fitch expects leverage to remain in the 5.0x-5.5x range through 2012. Additionally, NNN has a solid risk-adjusted capitalization ratio of 1.5x, which is strong for the rating category, due to a focus on stabilized, unencumbered retail property assets.

The ratings also point to the strength of NNN's management team, and the long-term track record of astute implementation of its business strategy, which entails acquiring, owning, and investing in single-tenant retail properties, generally under long-term triple net leases.

Fitch views as positive NNN's laddered debt maturity schedule, which contributes to a liquidity coverage ratio (unrestricted cash, availability under the company's unsecured revolving credit facility and expected retained cash flow after dividends divided by debt maturities and expected recurring capital expenditures) of 1.8x for the period Oct. 1, 2010 through Dec. 31, 2012. NNN's $362 million of availability under its $400 million unsecured revolving line of credit is the main driver of NNN's liquidity surplus. In the event that holders of NNN's 2026 convertible notes do not exercise their put option in 2011, liquidity coverage would be 5.2x. The conversion option is in the money and the bonds are currently trading at a premium to par. In addition, the financial covenants in the company's unsecured debt agreements do not limit NNN's financial flexibility.

NNN's unencumbered asset coverage of unsecured debt (based on an 8.5% cap rate on third quarter 2010 annualized unencumbered net operating income) was 2.5x as of Sept. 30, 2010. The coverage is strong for the rating category and provides ample protection to unsecured bondholders.

Fitch's credit concerns include NNN's small size, which has resulted in moderate geographical concentration. Texas represents 19% of annualized base rents (ABR), with the next largest concentration in Florida (9.6% of ABR), indicating vulnerability to regional demand drivers. Further, the convenience store industry represented 25.3% of ABR as of Sept. 30, 2010, and the next largest industry concentration was full-service restaurants at 9.8% of ABR, which exposes the company to industry specific volatility.

NNN's portfolio also includes non-necessity-based retailers (e.g. full-service restaurants, movie theatres, sporting goods) that may be adversely affected through retail demand cycles. Although the portfolio has performed well during the recent downturn, the company has exposure to certain higher credit risk tenants and may continue to experience tenant bankruptcies due to the nature of the retail business. It is possible that some of the locations leased to these tenants will be vacated in bankruptcy, leading to lost revenue until a property is re-tenanted, or a potential decline in value if the property is sold vacant.

The two-notch differential between NNN's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. Based on Fitch's report 'Equity Credit for Hybrids and Other Capital Securities,' dated Dec. 29, 2009, and available on Fitch's web site at '[ www.fitchratings.com ]', NNN's preferred shares are 75% equity-like and 25% debt-like, since they are perpetual and have no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring operating EBITDA was 5.3x as of Sept. 30, 2010, compared to 5.1x and 5.5x as of Dec. 31, 2009 and Dec. 31, 2008, respectively.

The Stable Outlook centers on Fitch's expectation that NNN's credit metrics will remain consistent with a 'BBB' rating through 2012. In addition, NNN's long-term triple net leases and manageable lease expiration schedule contribute to the stable cash flows of the portfolio. The Outlook also takes into account NNN's strong financial flexibility.

The following factors may have a positive impact on NNN's ratings and/or Outlook:

--Fixed-charge coverage sustaining above 3.5x (fixed-charge coverage was 3.0x for the 12 months ended Sept. 30, 2010);

--Net debt-to-recurring EBITDA sustaining below 4.5x (leverage was 5.2x as of Sept. 30, 2010);

--Unencumbered asset-to-unsecured debt ratio based on an 8.5% capitalization rate, sustaining above 3.0x (this ratio was 2.5x as of Sept. 30, 2010).

--Broader tenant and geographic diversity.

The following factors may have a negative impact on NNN's ratings and/or Outlook:

--Fixed-charge coverage sustaining below 2.5x;

--Net debt-to-recurring EBITDA sustaining above 6.0x;

--Unencumbered asset-to-unsecured debt ratio sustaining below 2.3x;

--A liquidity deficit.

NNN is a fully-integrated real estate investment trust (REIT) formed in 1984. The company's principal business is owning free-standing retail properties that are net leased primarily to retail tenants under long-term triple-net leases. As of Sept. 30, 2010, NNN owned 1,037 Investment properties, located in 43 states with a gross leasable area of approximately 11.7 million square feet. As of Sept. 30, 2010, the company had approximately $2.8 billion in undepreciated book assets and approximately $1.5 billion in book equity.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology, August 13, 2010;

--Criteria for Rating U.S. Equity REITs and REOCs, April 16, 2010;

--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;

--Rating Hybrid Securities, Dec. 29, 2009;

--Recovery Rating and Notching Criteria for REITs, Dec. 23, 2009.

Applicable Criteria and Related Research:

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

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