Fitch Ratings assigns a credit rating of 'BBB' to the $325 million 3.8% senior unsecured notes due October 2022 issued by National Retail Properties, Inc. (NYSE: NNN). The notes were issued at 98.465% of par to yield 3.984% and the spread to the benchmark rate is 235 basis points. Net proceeds from the offering are expected to be used to repay balances on the company's credit facility, fund future acquisitions and for general corporate purposes.
Fitch currently rates NNN as follows:
--IDR 'BBB';
--Unsecured revolving credit facility 'BBB';
--Senior unsecured notes 'BBB';
--Senior unsecured convertible notes 'BBB';
--Preferred stock 'BB+'.
The Rating Outlook is Stable.
The ratings take into account NNN's solid credit metrics, which are appropriate for the rating, as well as the company's diverse portfolio of net lease retail properties that have generated stable cash flows throughout cycles.
NNN's fixed-charge coverage ratio was solid at 2.9x for the trailing 12 months (TTM) ended June 30, 2012, pro forma for the notes offering, unchanged from 2.9x for full year 2011 and 2.9x for full year 2010. Fitch expects fixed-charge coverage to remain stable in the high 2x range through 2013 due to solid occupancy and long average remaining lease terms, partially offset by increased interest expense from the notes offering. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures and straight-line rents, divided by total interest incurred and preferred stock distributions.
NNN's free-standing retail property portfolio is highly granular and includes 1,506 properties spread throughout 47 states with a gross leasable area of approximately 17.8 million square feet as of June 30, 2012. Moreover, NNN's portfolio comprises over 300 tenants, thus limiting individual tenant credit risk.
NNN's leverage is strong for the 'BBB' rating. Net debt to last 12-months recurring operating EBITDA was 5.2x as of June 30, 2012, compared with 5.9x, 5.7x as of Dec. 31, 2011 and 2010, respectively. Fitch expects leverage to stabilize just below 5.0x over the next 12-24 months, based on same-store net operating income (NOI) growth of 1.5% in both 2012 and 2013, and a continuation of acquisitions being funded on a leverage-neutral basis.
The company has a solid liquidity profile. Pro forma for the $325 million notes offering, liquidity coverage is 1.7x for the period July 1, 2012 through Dec. 31, 2014. Fitch defines liquidity coverage as sources (unrestricted cash, availability under the company's unsecured revolving credit facility and expected retained cash flow after dividends) divided by uses (debt maturities, development funding commitments and expected recurring capital expenditures).
NNN has solid contingent liquidity. NNN's unencumbered asset coverage of unsecured debt was 2.2x as of June 30, 2012, based on a 9% capitalization rate applied to annualized second quarter 2012 unencumbered net operating income.
Fitch's credit concerns include NNN's moderate geographic concentration. Texas represents 22.2% of annualized base rents (ABR), with the next largest concentration in Florida (9.3% of ABR), indicating vulnerability to regional demand drivers.
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. The convenience store industry represented 22.6% of ABR as of June 30, 2012, although this is mitigated by the stable performance of this tenant segment. The next largest industry concentration was full-service restaurants at 11.4% of ABR.
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. 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. The Stable 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:
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x (fixed-charge coverage was 2.9x for the 12 months ended June 30, 2012);
--Fitch's expectation of net debt to recurring EBITDA sustaining below 5.0x (leverage was 5.2x as of June 30, 2012);
--Unencumbered assets to unsecured debt based on a stressed 9% capitalization rate, sustaining above 3.0x (this ratio was 2.2x as of June 30, 2012);
--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 assets to unsecured debt sustaining below 2.2x;
--A liquidity coverage ratio sustaining below 1.0x.
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:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Recovery Rating and Notching Criteria for REITs', May 3, 2012;
--'Criteria for Rating U.S. Equity REITs and REOCs', Feb. 27, 2012.
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', Dec. 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
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677739
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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