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Fitch Rates National Retail Properties' $250MM 5.7% Series E Preferred Stock 'BBB-'; Outlook Stable
May 30, 2013 / 3:17 PM / 5 years ago

Fitch Rates National Retail Properties' $250MM 5.7% Series E Preferred Stock 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, May 30 (Fitch) Fitch Ratings has assigned a credit rating of 'BBB-' to the $250 million 5.7% Series E cumulative redeemable preferred stock issued by National Retail Properties, Inc. (NYSE: NNN). The company intends to use the net proceeds for general corporate purposes, which may include funding acquisitions. Fitch currently rates National Retail Properties as follows: --Issuer Default Rating (IDR) 'BBB+'; --$500 million unsecured revolving credit facility 'BBB+'; --$1.5 billion senior unsecured notes 'BBB+'; --$223 million senior unsecured convertible notes 'BBB+'; --$538 million preferred Stock 'BBB-'. The Rating Outlook is Stable. KEY RATING DRIVERS The ratings are supported by leverage and fixed-charge coverage consistent with a 'BBB+' rating, a granular triple-net lease portfolio, 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. APPROPRIATE LEVERAGE NNN's leverage metrics are consistent with a 'BBB+' rating. Net debt-to-last 12-month (LTM) recurring operating EBITDA as of March 31, 2013 was 4.8x (4.0x pro forma for the preferred offering), 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 towards the latter half of the year. Adjusting for this timing, leverage in both periods would be approximately 5.0x. Fitch expects leverage to hover 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. STABLE OPERATING PERFORMANCE Occupancy was 97.8% as of March 31, 2013, up from 97.4% as of Dec. 31, 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 LTM ended March 31, 2013, up from 2.8x for full-year 2011. Fitch expects fixed-charge coverage to improve to just above 3.0x through 2014. 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. GRANULAR PORTFOLIO NNN has a diversified portfolio with the largest tenant representing just 5.5% of annualized base rent (ABR), and the top 10 tenants representing 39% of ABR at March 31, 2013. The largest industry segment (convenience stores) represents 19.8% of ABR as of March 31, 2013. HEALTHY LIQUIDITY Fitch views positively NNN's laddered debt maturity schedule, which contributes to a liquidity coverage ratio of 2.7x for the period April 1, 2013 through Dec. 31, 2014, pro forma for the preferred offering. 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 and expected recurring capital expenditures. NNN's unencumbered asset coverage of unsecured debt (based on a stressed 9% capitalization rate on first quarter 2013 (1Q'13) annualized unencumbered NOI) was 2.5x pro forma as of March 31, 2013. This level is adequate for the rating and provides contingent liquidity for NNN. The company also had an Adjusted Funds from Operations (AFFO) payout ratio of approximately 81% for 1Q'13. Fitch projects that the AFFO payout ratio will hover in the mid-to-high 80% range, which is indicative of good internally generated liquidity. 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. MODERATE GEOGRAPHIC CONCENTRATION Texas represents 21.7% of ABR, with the next largest concentration in Florida (9.3% 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 losses. 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. STABLE OUTLOOK 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. RATING SENSITIVITIES 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 and/or Outlook: --Fitch's expectation of fixed-charge coverage sustaining above 3.5x (coverage was 2.9x for the LTM ended March 31, 2013); --Fitch's expectation of leverage sustaining below 4.0x (pro forma leverage was 4.0x as of March 31, 2013); --Fitch's expectation of the ratio of unencumbered assets to pro forma net unsecured debt based on a stressed 9% capitalization rate sustaining above 3.0x (this ratio was 2.5x as of March 31, 2013). The following factors may have a negative impact on NNN's ratings and/or Outlook: --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 below 2.4x; --A liquidity coverage ratio sustaining below 1.0x. Contact: Primary Analyst George Hoglund, CFA Associate Director +1-212-908-9149 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Sean Pattap Senior Director +1-212-908-0642 Committee Chairperson Philip Zahn Senior Director +1-312-606-2336 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013); --'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 13, 2012); --'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012); --'Corporate Rating Methodology' (Aug. 8, 2012); --'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012). Applicable Criteria and Related Research: Parent and Subsidiary Rating Linkage here Corporate Rating Methodology here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Criteria for Rating U.S. Equity REITs and REOCs here Recovery Ratings and Notching Criteria for Equity REITs here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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