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 October 15, 2015 - 6:02 PM EDT
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Fitch Rates National Retail Properties Unsecured Bonds 'BBB+'

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.

Tenant Consolidation

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.

Granular Portfolio

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%).

C-Store Exposure

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 dividends.

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+' rating.

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 2012.

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 of 7.2%.

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.

KEY ASSUMPTIONS

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.

RATING SENSITIVITIES

The following factors may have a positive impact on NNN's ratings and/or Outlook:

--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 Outlook:

--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

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Equity REITs (pub. 18 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992397

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Britton Costa
Director
+1-212-908-0524
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Steven Marks
Managing Director
+1-212-908-9161
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (October 15, 2015 - 6:02 PM EDT)

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