OREANDA-NEWS. Fitch Ratings has affirmed the ratings for National Retail Properties, Inc. (NYSE: NNN), including the Issuer Default Rating (IDR) at 'BBB+'. A full list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The affirmation of NNN's IDR at 'BBB+' 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 triple-net leased property portfolio. Credit strengths also include strong financial flexibility as measured by above-average liquidity coverage and appropriate contingent liquidity as measured by 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. While specific tenant credit profiles have improved via M&A over the past few years, this could be negated in part should defaults in the high-yield market flow through to NNN's portfolio.

Fitch anticipates that leverage will sustain around current levels and 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 predominantly with debt would be a credit concern.

Disciplined Investment Focus

NNN invests in a fragmented but competitive industry (i.e. unrated net lease retail real estate). The company's portfolio generates predictable cash flow, as evidenced by annual rent bumps of 1.5% to 2% over 15-20-year lease terms and consistent occupancy despite the focus on unrated and lower rated tenants. From 2003 through 2015, occupancy did not fall below 96.4% and stood at 99.1% as of Dec. 31, 2015.

NNN's weighted average remaining lease term is long at 11.4 years, signaling durability in cash flows, absent tenant bankruptcies and lease rejections. Approximately 22% of the company's annualized rental revenue is derived from properties leased to investment-grade rated tenants. Overall, average tenant rent coverage was solid at 3.3x as of Dec. 31, 2015, with only 1.0% of leases set to expire in 2016 followed by 3.0% in 2017 and 6.3% in 2018. Combined, these factors provide a buffer for NNN's credit metrics against the cyclicality of tenant businesses and real estate markets.

Granular Portfolio

As of Dec. 31, 2015, the company owned 2,257 properties leased to over 400 tenants across 47 states. Top states included Texas (19.7% of average base rent [ABR]), Florida (9.3%), Ohio (5.2%), North Carolina (5.2%), and Illinois (4.9%). NNN's largest exposure is in Texas and Florida; however, the portfolio is spread across numerous metropolitan statistical areas in these states, including 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 Dec. 31, 2015 were convenience stores (c-stores, 16.7% of ABR), full-service restaurants (11.0%), automotive service (7.0%), limited-service restaurants (7.2%) and family entertainment centers (5.6%).

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 year ended Dec. 31, 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.

Fitch's base case anticipates that 2.0% 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 2018. 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 above 3x. In both cases, this ratio would be appropriate for the 'BBB+' rating.

Good Liquidity Position and Access to Capital

Liquidity coverage is strong for the rating at 2.5x for the period Jan. 1, 2016 through Dec. 31, 2017. NNN's primary source of liquidity is its $650 million revolving credit facility due 2019. Fitch calculates liquidity coverage as sources of liquidity (unrestricted cash, availability under the company's unsecured credit facility, and projected retained cash flows from operating activities after dividends) divided by uses of liquidity (debt maturities and projected development costs).

Liquidity coverage benefits from high availability under the unsecured line, lack of recurring capital expenditures, and laddered near-term debt maturities. As of Dec. 31, 2015, the company had only 0.3% of total debt maturing in 2016, but 12.7% of debt maturing in 2017. In addition, Fitch views NNN as having strong access to capital, which further supports its liquidity position.

NNN had limited secured debt (1.2% of total debt as of Dec. 31, 2015), improving its financial flexibility. Contingent liquidity is strong, as unencumbered assets (4Q15 unencumbered NOI divided by a stressed capitalization rate of 9%) covered net unsecured debt by 2.7x as of Dec. 31, 2015, which is strong for the 'BBB+' rating. This ratio has been between 2.4x and 3x since 2012.

Leverage Remains Appropriate

NNN's net debt-to-recurring operating EBITDA was strong for the 'BBB+' rating at 4.5x for the year ended Dec. 31, 2015, compared with 4.4x in both 2014 and 2013. Fitch recently revised our treatment of REIT cumulative perpetual preferred stock to 50% equity credit from 100%. NNN's leverage based on net debt including 50% of preferred stock was 5.1x for the year ended Dec. 31, 2015, compared with 5.1x and 5.2x in 2014 and 2013, still appropriate for the 'BBB+' rating.

Fitch anticipates that NNN will fund its growth with more debt than equity on a go-forward basis, which, combined with retained cash flow after dividends, would result in leverage (including 50% preferred stock) sustaining in the low 5x range.

Dividend Trend Highlights Growth Focus

Fitch expects NNN will continue to increase its dividend going forward due to shareholder expectations but the pay-out ratio will remain appropriate and allow the company to retain approximately $75 million of operating cash flow per year. NNN has raised its dividend annually for the past 26 years as a result of increases in adjusted funds from operations (AFFO) and taxable net income arising from both internal and external growth. NNN's AFFO pay-out ratio was 75% for the year ended Dec. 31, 2015, down from 77.3% in 2014 and 79.2% in 2013.

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.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--SSNOI growth of 2% for 2016-2018;
--Acquisitions of $400 million in 2016, $450 million in 2017, and $500 million in 2018;
--Dispositions of $100 million in 2016, $50 million in 2017 and 2018;
--$400 million unsecured bond offerings in both 2017 and 2018;
--Equity issuance of $150 million in 2016, $225 million in 2017 and none in 2018. If NNN's share price reaches the level where it would not be willing to issue equity, Fitch assumes the company would reduce net acquisitions to maintain leverage at current levels.

RATING SENSITIVITIES

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

--Fitch's expectation of leverage (including 50% equity credit-to-preferred stock) sustaining below 4.5x (leverage as of Dec. 31, 2015 was 5.1x);
--Fitch's expectation of fixed charge coverage sustaining above 3.5x (coverage was 3.4x for year ended Dec. 31, 2015);
--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 2.5x as of Dec. 31, 2015).

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

--Fitch's expectation of leverage sustaining above 5.5x;
--Fitch's expectation of fixed-charge coverage 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 RATING ACTIONS

Fitch has affirmed the following ratings:

--Issuer Default Rating (IDR) at 'BBB+';
--Unsecured revolving credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Preferred stock at 'BBB-'.

The Rating Outlook is Stable.