Fitch Ratings has assigned a credit rating of 'BBB+' to the $400 million
of 4.00% senior unsecured notes due 2025 issued by National Retail
Properties, Inc. (NYSE: NNN). The company expects to use the net
proceeds to repay outstanding indebtedness, to fund future acquisitions
and for general corporate purposes. The notes were issued at 99.759% of
par to yield 4.029%. A full list of Fitch's current ratings for NNN
follows at the end of this release.
KEY RATING DRIVERS
The rating reflects the company's disciplined investment focus on
single-tenant retail real estate and predictable cash flow in excess of
fixed charges generated from a granular net leased property portfolio.
Credit strengths also include strong financial flexibility as measured
by good liquidity coverage and unencumbered asset coverage of unsecured
debt, and minimal secured debt. Balancing these strengths is some tenant
concentration and exposure to predominantly below investment-grade rated
tenants. However, tenant credit continues to improve via recent mergers
and acquisitions activity affecting top tenants, notably Susser Holdings
Corporation and The Pantry, Inc.
Fitch anticipates that leverage will rise moderately from currently low
levels but remain appropriate for the 'BBB+' rating. NNN has prudently
funded its recent acquisitions primarily with common and preferred
equity but also from proceeds from asset sales and long-term debt; a
more aggressive approach toward funding acquisitions more heavily with
debt would be a credit concern.
Disciplined Investment Focus
NNN invests in a fragmented industry with increasing institutional
investor competition. The company's portfolio generates predictable cash
flow as evidenced by annual rent bumps of 1.5% to 2% over a
15-to-20-year lease term and consistent occupancy. From 2003 to 2014,
occupancy did not fall below 96.4% and stood at 98.8% as of June 30,
2015. Lease renewal rates have been strong at 87% from 2007-2014.
NNN's weighted average remaining lease term is long at 11.4 years,
signalling durability in cash flows, absent tenant bankruptcies.
Approximately 25% of the company's annualized rental revenue is derived
from properties leased to investment-grade rated tenants.
NNN is benefiting from consolidation within select tenants industries,
which should further strengthen cash flow predictability. For example,
in August 2014, Energy Transfer Partners, L.P. (NYSE: ETP, IDR of 'BBB-'
with a Stable Outlook) and Susser Holdings Corporation completed a $1.8
billion merger. An operating subsidiary of ETP remains NNN's top tenant
at 6.3% of annualized base rent (ABR) in second quarter 2015 (2Q'15).
In December 2014, Alimentation Couche-Tard Inc. (TSX: ATD), and The
Pantry, Inc. (NASDAQ: PTRY), announced a definitive merger agreement
under which Couche-Tard will acquire The Pantry in a $1.7 billion
all-cash transaction. After Mister Car Wash (4.4% of ABR), Pantry was
NNN's third largest tenant at 3.9% of ABR in 2Q'15.
Tenant consolidation in recent years has also included 7-Eleven's
purchase of Speedy Stop and Tigermarket retail locations from C. L.
Thomas, the acquisition of Orchard Supply Hardware by Lowe's, and the
acquisition of General Parts International by Advance Auto Parts.
Overall, average tenant rent coverage was solid at 2.9x as of June 30,
2015, with only 0.5% of leases set to expire in the remainder of 2015
followed by 1.4% in 2016 and 3.2% in 2017.
As of June 30, 2015, the company owned 2,138 properties leased to over
400 tenants across 47 states. Top states included Texas (20.4% of ABR),
Florida (9.6%), North Carolina (5.5%), Illinois (4.9%), and Georgia
(4.8%). NNN is overweight in Texas and Florida; however, the portfolio
is spread across numerous metropolitan statistical areas in these
states, such as Dallas, Houston, Brownsville, Austin and San Antonio in
Texas, and Tampa, Orlando, Miami and Jacksonville in Florida.
The company's top lines of trade as of June 30, 2015 were convenience
stores (c-stores, 17.5% of ABR), full service restaurants (8.9%),
automotive service (7.1%), limited service restaurants (7.1%) and family
entertainment centers (5.6%).
The non-discretionary nature of NNN's retail locations offset Fitch's
concerns about the company's exposure to c-stores. According to the
National Association of Convenience Stores, c-stores sell 80% of the
fuels purchased in the U.S. On average, 71% of a store's total sales are
motor fuels, but motor fuels only account for 36% of profit dollars. The
discrepancy between sales and profits is due to the fact that fuel
margins are low; retailer gross fuel margins averaged 17.1 cents per
gallon from 2009-2013 according to Oil Price Information Service.
Therefore, the recent decline in crude oil prices has had a negligible
impact on c-store operators.
Strong Fixed Charge Coverage for 'BBB+'
The company's fixed charge coverage (FCC) ratio was strong for the
'BBB+' rating at 3.4x for the trailing 12 months [TTM] ended June 30,
2015, compared with 3.2x in both 2014 and 2013, and 3.0x in 2012.
Contractual rent escalators on existing properties and recently acquired
assets are the primary drivers behind the slight improvement in FCC.
Fitch defines FCC as recurring operating EBITDA less straight-line rent
adjustments divided by total cash interest incurred and preferred stock
NNN's tenants are responsible for funding all recurring maintenance
capital expenditures, leasing commissions, or tenant improvements
associated with its properties. Fitch's base case anticipates that 1.5%
same-store net operating income (SSNOI) growth along with additional
acquisition-related NOI at capitalization rates in the low 7% range will
result in coverage sustaining near 3.5x through 2016. In a stress case
not anticipated by Fitch in which the company experiences tenant
bankruptcies resulting in a 5% decline in SSNOI, FCC would remain just
above 3x. In both cases, this ratio would be appropriate for the 'BBB+'
Good Liquidity Position and Access to Capital
Pro forma liquidity coverage including the $400 million unsecured bond
issuance proceeds, calculated as liquidity sources divided by uses, is
4.4x for the period July 1, 2015 to Dec. 31, 2016. Sources of liquidity
include the bond net proceeds, unrestricted cash, availability under the
company's unsecured credit facility, and projected retained cash flows
from operating activities after dividends. Uses of liquidity include
debt maturities and projected development costs. Liquidity coverage
benefits from high availability under the unsecured line, the
aforementioned lack of recurring capital expenditures and laddered
near-term debt maturities. As of June 30, 2015, the company had 6.8% of
total debt maturing in 2015 but less than 1% of debt maturing in 2016.
In addition, Fitch views NNN as having strong access to capital which
further supports its liquidity position.
NNN had limited secured debt (0.4% of total market capitalization as of
June 30, 2015) illustrating excellent financial flexibility. In
addition, contingent liquidity is strong, as unencumbered assets (2Q'15
unencumbered NOI divided by a stressed capitalization rate of 9%)
covered net unsecured debt by 2.4x as of June 30, 2015, which is strong
for the 'BBB+' rating. This ratio has been between 2.4x and 3x since
Fitch Expects Leverage to Rise Moderately
NNN's June 30, 2015 net debt-to-recurring operating EBITDA was strong
for the 'BBB+' rating at 4.5x for the TTM ended June 30, 2015, compared
with 4.4x in 2014 and 2013 and 5.4x in 2012. Fitch anticipates that NNN
will fund its growth more heavily with debt than equity on a go-forward
basis, which would result in leverage trending back towards the high 4x
range, still in line with the 'BBB+' level.
The company improved its leverage profile despite its track record of
acquisitions. From 2010-1H15, the company acquired $2.1 billion of
properties (65% from relationship tenants) at a weighted average
capitalization rate of 8.3%, but the $303 million of acquisitions
year-to-date in 2015 have been at a weighted average capitalization rate
Dividend Trend Highlights Growth Focus
The company raised its dividend annually for the past 26 years as a
result of increases in adjusted funds from operations (AFFO) and taxable
net income, stemming from both internal and external growth. NNN's AFFO
pay-out ratio was 74.6% in 2Q'15, down from 77.3% in 2014 and 79.2% in
2013. The current pay-out ratio is not a credit concern as it remains
comfortably below 100% and results in the company retaining
approximately $75 million annually in organic liquidity.
Fitch's key assumptions within the rating case for NNN include:
--Same store net operating income growth of 1.5% per year to reflect
contractual rent bumps and operating expense growth to maintain
recurring operating EBITDA margins around 90%;
--General and administrative expenses sustain around 6%;
--Net acquisitions of $430 million and $480 million in 2015 and 2016 at
7%-7.5% cap rates;
--That NNN will issue common equity to partially fund acquisitions;
however, should NNN not issue equity Fitch would expect it to reduce
acquisition volumes or to increase disposition volumes.
The following factors may have a positive impact on NNN's ratings and/or
--Fitch's expectation of leverage sustaining below 4x (leverage was 4.5x
for TTM ended June 30, 2015);
--Fitch's expectation of FCC sustaining above 3.5x (coverage was 3.4x
for TTM ended June 30, 2015);
--Fitch's expectation of the ratio of unencumbered assets-to-unsecured
debt based on a 9% capitalization rate, sustaining above 3x (this ratio
was 2.4x as of June 30, 2015).
The following factors may have a negative impact on NNN's ratings and/or
--A more aggressive approach towards funding acquisitions heavily with
debt financing, which is not Fitch's expectation;
--Fitch's expectation of leverage sustaining above 5.5x;
--Fitch's expectation of FCC sustaining below 2.7x;
--Fitch's expectation of the ratio of unencumbered assets-to-unsecured
debt based on a 9% capitalization rate sustaining below 2.5x.
FULL LIST OF RATINGS
Fitch currently rates NNN as follows:
--Issuer Default Rating (IDR) 'BBB+';
--Unsecured revolving credit facility 'BBB+';
--Senior unsecured notes 'BBB+';
--Preferred stock 'BBB-'.
The Rating Outlook is Stable.
Related Committee Date: April 23, 2015
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Equity REITs (pub. 18 Nov
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis (pub. 25 Nov 2014)
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