NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a credit rating of 'BBB+' to the $350 million 3.3% senior unsecured notes due 2023 issued by National Retail Properties, Inc. (NYSE: NNN). The notes were issued at 99.259% of par to yield 3.388%, representing a 165 basis point spread to the benchmark treasury yield. The company intends to use the proceeds to repay balances on its unsecured credit facility, fund future acquisitions and for general corporate purposes.
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+';
--$288 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 impacted 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 annualized 4Q12 recurring operating EBITDA was 5.1x as of Dec. 31, 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 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 4.7-5.0x range through 2014, which is consistent with the 'BBB+' IDR. In a more adverse operating environment than currently anticipated by Fitch whereby 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 97.9% as of Dec. 31, 2012, 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 12 months ended Dec. 31, 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 8.3%, approximately 500 basis points 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 whereby 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 5.4% of annualized base rent (ABR), and the top 10 tenants representing 38.9% of ABR at Dec. 31, 2012. This is a decline from 9.1% and 45.9%, respectively as of Dec. 31, 2009. The largest industry segment (convenience stores) represents 19.8% of ABR as of Dec. 31, 2012, and is down from 26.7% at Dec. 31, 2009.
HEALTHY LIQUIDITY
Fitch views positively NNN's laddered debt maturity schedule, which contributes to a liquidity coverage ratio of 1.8x for the period Jan. 1, 2013 through Dec. 31, 2014, pro forma for the bond 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 9% capitalization rate on 4Q 2012 annualized unencumbered NOI) was 2.4x as of Dec. 31, 2012. This level is adequate for the rating and provides contingent liquidity for NNN.
The company also has an Adjusted Funds from Operations (AFFO) payout ratio of approximately 85% for the TTM ended Dec. 31, 2012. Fitch projects that the AFFO payout ratio will remain in the mid-to-high 80% range, which provides additional flexibility to NNN.
ACCESS TO MULTIPLE CAPITAL SOURCES
In addition to the aforementioned $350 million notes issuance, NNN's other recent issuances include a $325 million 10-year unsecured notes offering in August 2012 at a yield of 3.98%, a $287.5 million 6.625% series D preferred stock issuance in Feb. 2012, which in part refinanced $92 million of the series C preferred that had a coupon of 7.375%. Additionally, in Oct. 2012, 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 + 117.5 basis points (bps) (down from L + 150bps), and extended the maturity to 2016, with a one-year extension option to 2017. Lastly, the company established an at-the-market (ATM) equity offering program in May 2012, with a total capacity to sell 9 million shares. During 2012, NNN sold 4.3 million shares for net proceeds of $125 million and during the first quarter of 2013, NNN sold 5.0 million shares for net proceeds of $164 million. These transactions highlight NNN's robust access to various sources of capital on increasingly favorable terms.
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 21.8% of annualized base rents (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 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 12 months ended Dec. 31, 2012);
--Fitch's expectation of leverage sustaining below 4.0x (leverage was 5.1x as of Dec. 31, 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 2.4x as of Dec. 31, 2012).
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.
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:
--'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 REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
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