Fitch Affirms National Retail Properties, Inc.'s IDR at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed the credit ratings for National Retail Properties, Inc. (NYSE: NNN) as follows:

--Issuer Default Rating (IDR) at 'BBB+';

--$500 million unsecured revolving credit facility at 'BBB+';

--$1.5 billion senior unsecured notes at 'BBB+';

--$575 million preferred stock at 'BBB-'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The affirmation of NNN's IDR at 'BBB+' reflects the company's disciplined investment focus on freestanding retail real estate and predictable cash flow in excess of fixed-charges generated from a granular triple-net leased property portfolio. Credit strengths also include strong financial flexibility as measured by good liquidity coverage and unencumbered asset coverage as well as minimal secured debt. Balancing these strengths is some tenant concentration, a risk mitigated by adequate rent coverage and improving tenant credit. Fitch expects that NNN's leverage will rise from currently low levels but will remain consistent with the 'BBB+' rating.

Disciplined Investment Focus

NNN's strategy involves investing in single-tenant retail properties, a sector with emerging institutional investor competition. The company's portfolio generates predictable cash flow as evidenced by annual rent bumps of 1.5% to 2.0% over a 15-to-20-year lease term and consistent occupancy. From 2003 to 2012, occupancy never fell below 96.4% and stood at 98.1% as of Sept. 30, 2013.

Solid tenant credit quality (underpinned by national/regional retailers) and mild lease rollovers should limit cash flow volatility going forward, absent tenant bankruptcies. Average tenant rent coverage was solid at 2.8x as of Sept. 30, 2013, with only 0.4% of leases set to expire in the fourth quarter of 2013 (4Q'13) followed by 2.3% in 2014 and 2.1% in 2015.

Granular Portfolio

As of Sept. 30, 2013, the company owned 1,850 properties leased to over 350 tenants across 47 states. Top states included Texas (20.6% of annualized base rent or ABR), Florida (10.6%), Illinois (5.3%), Georgia (4.9%) and North Carolina (4.7%). 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.

Strong Fixed Charge Coverage for 'BBB+'

The company's fixed-charge coverage ratio was strong for the 'BBB+' rating at 3.1x for the trailing 12 months (TTM) ended Sept. 30, 2013, compared with 3.0x in 2012 and 2.9x in 2011. Incremental EBITDA from acquisitions coupled with contractual rent escalators are the primary drivers behind the improvements in coverage. Fitch defines fixed-charge coverage 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 (NOI) growth along with additional acquisition-related NOI will result in coverage sustaining around 3.0x through 2015. In a stress case not anticipated by Fitch in which the company experiences tenant bankruptcies resulting in a 3% cumulative decline in recurring operating EBITDA, coverage would remain just below 3.0x. In both cases, coverage would be appropriate for the 'BBB+' rating.

Good Liquidity Position

Liquidity coverage, calculated as liquidity sources divided by uses, is 1.9x for the period Oct. 1, 2013 to Dec. 31, 2015. Sources of liquidity include 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 full availability under the unsecured line, the aforementioned lack of recurring capital expenditures and laddered near-term debt maturities. As of Sept. 30, 2013, the company had 9.9% of debt maturing in both 2014 and 2015.

Contingent liquidity is also strong as unencumbered assets (3Q'13 unencumbered NOI divided by a stressed capitalization rate of 9.0%) covered net unsecured debt by 2.8x as of Sept. 30, 2013, which is strong for the 'BBB+' rating.

Low Secured Debt

Only 0.2% of total market capitalization as of Sept. 30, 2013 was secured debt, strengthening financial flexibility. During 2013, NNN continued its track record of accessing multiple sources of capital by issuing common stock including via its second at-the-market equity program as well as 3.3% senior notes in April 2013 and 5.7% series E preferred stock in May 2013.

Dividend Track Record Requires Growth

NNN's adjusted funds from operations (AFFO) payout ratio was 80.4% in 3Q'13, down from 83.4% in 2012 and 88.7% in 2011, all of which are indicative of good internally generated capital. The company has raised its dividend annually for the past 24 years, signaling a priority of growth, albeit not to the detriment of unsecured bondholders.

Mild Tenant Concentration

As of Sept. 30, 2013, the company's top five tenants were Susser Holdings (5.1% of ABR), Mister Car Wash (5.0%), Pantry (4.5%), 7-Eleven (4.5%) and L.A. Fitness (3.9%). Despite this concentration, the company's asset base is benefiting from tenant consolidation and selective improvements in tenant credit quality (e.g., 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 pending acquisition of General Parts International by Advance Auto Parts).

Leverage Expected to Increase

NNN's Sept. 30, 2013 net debt to TTM recurring operating EBITDA was strong for the 'BBB+' rating at 4.6x (4.2x for the annualized 3Q'13), compared with 5.5x in 2012 and 6.0x in 2011. The company funded recent acquisitions more heavily with equity than debt and in July 2013 converted the 5.125% convertible senior notes to equity, resulting in de-leveraging. 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 5.0x, still in line with the 'BBB+' level.

Preferred Stock Notching

The two-notch differential between NNN's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch research titled 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', 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 of a confluence of strategic predictability, limited fixed-charge coverage volatility, and good financial flexibility, offset by an expected uptick in leverage.

Convertible Unsecured Notes

Fitch has withdrawn the 'BBB+' rating on NNN's convertible unsecured notes, the last of which (5.125% convertible senior notes due 2028) were called for redemption in July 2013. The rating of this debt instrument is no longer considered by Fitch to be relevant to the agency's coverage.

RATING SENSITIVITIES

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 3.1x for the 12 months ended Sept. 30, 2013);

--Fitch's expectation of leverage sustaining below 4.0x (net debt as of Sept. 30, 2013 to TTM recurring operating EBITDA was 4.6x);

--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 2.8x as of Sept. 30, 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 the ratio of unencumbered assets to unsecured debt based on a 9% capitalization rate, sustaining below 2.5x.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Dec. 23, 2013);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013);

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);

--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013).

Applicable Criteria and Related Research:

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814436

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