Jan 16 - Fitch Ratings has upgraded the credit ratings of
National Retail Properties, Inc. (NYSE: NNN) as follows:
--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--$500 million unsecured revolving credit facility to 'BBB+' from 'BBB';
--$1.2 billion senior unsecured notes to 'BBB+' from 'BBB';
--$223 million senior unsecured convertible notes to 'BBB+' from 'BBB';
--$288 million preferred stock to 'BBB-' from 'BB+'.
The Rating Outlook is Stable.
The upgrade is driven by Fitch's expectation of leverage sustaining at a level
consistent with a 'BBB+' rating, coupled with growth in the overall size of the
triple net leased retail portfolio that has contributed to declines in tenant
and industry concentration. The upgrade also reflects the company's flexible
funding profile, laddered debt maturity schedule, and strong access to capital.
NNN also has a strong management team. The rating takes into account credit
concerns including exposure to non-necessity-based retailers that may be
adversely affected through retail demand cycles, as well as tenant credit risk.
In Fitch's view, NNN's leverage metrics are consistent with a 'BBB+' rating. Net
debt-to-last 12 months recurring operating EBITDA was 5.0x as of Sept. 30, 2012,
down from 5.9x as of Dec. 31, 2011, and 5.7x as of Dec. 31, 2010. Leverage in
2011 and 2010 was skewed higher by the timing of acquisitions toward the latter
half of the year. Adjusting for this timing, leverage in both periods would be
approximately 5.0x. Leverage at Sept. 30, 2012 based on annualized 3Q'12 EBITDA
was 4.7x and management targets leverage on a normalized basis in the high 4.0x
Fitch expects leverage to remain in the 4.7x-5.0x range through 2014, which is
consistent with the 'BBB+' IDR. In a more adverse operating environment than
currently anticipated by Fitch wherein net operating income (NOI) declines by 3%
in each of 2013 and 2014, leverage would decline to 5.5x in 2014, which would be
at the upper end of the range appropriate for the 'BBB+' rating.
PORTFOLIO GROWTH ENHANCES DIVERSIFICATION
NNN's asset base has grown significantly over the past few years, enhancing an
already granular triple net leased retail property portfolio. Recurring
operating EBITDA grew to $277.4 million for the TTM ended Sept. 30, 2012, from
$205.7 million in 2009. As of Sept. 30, 2012 the portfolio consisted of 1,530
properties totaling 18.3 million square feet, up from 1,015 properties with 11.4
million square feet at Dec. 31, 2009.
Tenant diversification has improved, with the largest tenant representing just
6.0% of annualized base rent (ABR), and the top 10 tenants representing 38.8% of
ABR at Sept. 30, 2012. This is a decline from 9.1% and 45.9%, respectively, as
of Dec. 31, 2009. The largest industry segment (convenience stores) represents
21.6% of ABR as of Sept. 30, 2012, and is down from 26.7% at Dec. 31, 2009.
STABLE OPERATING PERFORMANCE
Occupancy was 97.9% as of Sept. 30, 2012, up from 97.2% as of Sept. 30, 2011.
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 2.9x for the
12 months ended Sept. 30, 2012, up from 2.8x for full year 2011. Fitch expects
fixed charge coverage to improve to just above 3.0x through 2014 due to recent
acquisitions at attractive spreads (capitalization rates averaging 8.5%,
approximately 450 basis points (bps)over recent bond issuance), combined with
long average remaining lease terms of 12 years, stable occupancy and fixed
charges. In a more adverse operating environment than currently anticipated by
Fitch wherein NOI declines by 3% in each of 2013 and 2014, fixed charge coverage
would decline to 2.7x in 2014, which would be at the low end of the range
appropriate for the 'BBB+' rating.
The company also has an Adjusted Funds from Operations (AFFO) payout ratio of
approximately 88% for the TTM ended Sept. 30, 2012. Fitch projects that the
AFFO payout ratio will remain in the mid-to-high 80% range, which is appropriate
for the rating.
STRONG MANAGEMENT TEAM
NNN has a long-term track record of astute implementation of its business
strategy that entails acquiring, owning, and investing in single-tenant retail
properties, generally under long-term triple net leases.
Fitch views positively NNN's laddered debt maturity schedule, which contributes
to a liquidity coverage ratio of 1.6x for the period Oct. 1, 2012 through Dec.
31, 2014. Fitch defines liquidity coverage as liquidity sources divided by
liquidity uses. Liquidity sources include unrestricted cash, availability under
the company's unsecured revolving credit facility and expected retained cash
flow after dividends. Liquidity uses include debt maturities, development
expenditures and expected recurring capital expenditures.
ACCESS TO MULTIPLE CAPITAL SOURCES
NNN's recent issuances include a $325 million 3.8% 10-year unsecured notes
offering in August 2012 at a yield of 3.98% and a $287.5 million 6.625% series D
preferred stock issuance which refinanced the series C preferred that had a
coupon of 7.375%. Additionally, the company amended its unsecured revolving
line of credit, increasing the capacity by $50 million to $500 million,
expandable to $1 billion, with a borrowing rate of L + 117.5bps (down from L +
150bps), and extended the maturity to 2016, with a one-year extension option to
2017. Finally, the company established an at-the-market (ATM) equity offering
program in May 2012, with a total capacity to sell 9 million shares. YTD as of
Sept. 30, 2012, NNN has sold 2.3 million shares for net proceeds of $65.4
million. These transactions highlight NNN's robust access to various sources of
capital on increasingly favorable terms.
NNN's unencumbered asset coverage of unsecured debt (based on a 9.0%
capitalization rate on 3Q'12 annualized unencumbered NOI) was 2.6x as of Sept.
30, 2012. This level is adequate for the rating and provides ample contingent
liquidity for NNN.
MODERATE GEOGRAPHIC CONCENTRATION
Texas represents 21.8% of ABR, with the next largest concentration in Florida
(9.2% of ABR). However, within both of these large states, NNN's properties are
well-distributed, mitigating the geographic concentration risk.
HIGHER RISK TENANTS
NNN's tenants include non-necessity-based retailers (e.g. electronics,
full-service restaurants, movie theatres, sporting goods) and NNN 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.
Notably, only two of the top 15 tenants are rated by Fitch, and those tenants
have speculative-grade ratings (AMC Entertainment - IDR 'B'; Best Buy - IDR
'BB-'). The lower credit quality highlights the risk of potential revenue
PREFERRED STOCK NOTCHING
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 'Treatment and Notching of Hybrids in Nonfinancial Corporate
and REIT Credit Analysis,' available on Fitch's Web site at
www.fitchratings.com, these preferred securities are deeply subordinated and
have loss absorption elements that would likely result in poor recoveries in the
event of a corporate default.
The Stable Outlook centers on Fitch's expectation that NNN's credit metrics will
remain consistent with a 'BBB+' rating over the next 12-24 months. In addition,
NNN's long-term triple net leases (typically 15-20 years in term) and manageable
lease expiration schedule contribute to the stable cash flows of the portfolio.
WHAT COULD TRIGGER A RATING ACTION
Fitch does not anticipate additional positive rating momentum in the near term;
however, the following factors may have a positive impact on NNN's ratings
--Fitch's expectation of fixed charge coverage sustaining above 3.5x (coverage
was 2.9x for the 12 months ended Sept. 30, 2012);
--Fitch's expectation of leverage sustaining below 4.0x (leverage was 5.0x as of
Sept. 30, 2012);
--Fitch's expectation of the ratio of unencumbered assets to unsecured debt
based on a 9% capitalization rate, sustaining above 3.0x (this ratio was 2.6x as
of Sept. 30, 2012).
The following factors may have a negative impact on NNN's ratings and/or
--Fitch's expectation of fixed-charge coverage sustaining below 2.7x;
--Fitch's expectation of leverage sustaining above 5.5x;
--Fitch's expectation of unencumbered asset-to-unsecured debt ratio sustaining
--A liquidity coverage ratio sustaining below 1.0x.
George Hoglund, CFA
One State Street Plaza
New York, NY 10004
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