Fitch Upgrades National Retail Properties' Senior Unsecured to 'BBB'; Pfd Stock to 'BBB-'.
-- Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
-- Unsecured line of credit to 'BBB' from 'BBB-';
-- Senior unsecured notes to 'BBB' from 'BBB-';
-- Senior unsecured convertible notes to 'BBB' from 'BBB-';
-- Preferred stock to 'BBB-' from 'BB+'.
Fitch's action affects approximately $1 billion in securities. The Rating Outlook is Stable.
Fitch's upgrades follow NNN's accomplishment of several goals over the past year that have strengthened the company's creditworthiness, particularly in light of Fitch resolving the company's Outlook. Fitch revised NNN's Rating Outlook to Positive from Stable in 2005, and in 2006, Fitch specifically identified the following factors in connection with resolving the Positive Outlook: NNN's ability to keep core earnings from commercial net leased properties at current or higher levels relative to debt-service requirements, maintain manageable risk-adjusted capitalization, remain disciplined with respect to build-for-sale activities that have been successful thus far, and continue diversifying an already broad tenant base.
In 2007, through a sale-leaseback transaction with a large convenience store owner, the purchase of theater properties from a privately held theater operator, and other accretive acquisitions, NNN has been able to grow earnings from stabilized free standing retail properties. Fitch calculates that NNN's fixed charge coverage ratio (defined as recurring EBITDA divided by interest expense, capitalized interest and preferred dividends) was 2.7 times (x) for the year-to-date period ending Sept. 30, 2007, improved from 2.1x for the comparable period in 2006. Given that 97% of NNN's assets are unencumbered by mortgage debt, unencumbered properties have performed in a way that provides ample downside protection to unsecured bondholders.
With respect to capital, NNN's risk-adjusted capitalization is adequate for the 'BBB' senior unsecured debt level. Although NNN continues to invest modestly in higher-risk real estate assets such as mezzanine loans, mortgage residual interests in securitizations, and development properties through the company's taxable REIT subsidiary, which admittedly contribute to FFO growth and common stock dividend increases, the company's mostly unencumbered portfolio and leverage level provide evidence of appropriate risk-adjusted capitalization for the 'BBB' rating level. In addition, Fitch calculates that company's debt-to-recurring EBITDA ratio was 6.1x as of Sept. 30, 2007, improved from 6.9x as of Sept. 30, 2006.
Fitch recognizes management's focus on asset sales as an element of active portfolio management and intention to generate approximately $80 million in core portfolio dispositions in 2008. However, with respect to offsetting factors, Fitch views cash flows from asset sales as a more volatile cash flow source than core operating earnings, and significantly discounts this cash flow.
Another credit concern for Fitch is NNN's increased exposure to the convenience store industry, which is nevertheless a fragmented line of trade. Fitch does not believe that NNN's exposure to convenience store tenants will decline materially in the near term.
Fitch's upgrade of NNN's preferred stock to investment-grade follows the redemption of $45 million 9% series A preferred stock in 2007 and common equity raises through the company's Dividend Reinvestment and Stock Purchase Plan and equity offering in April 2007. These financial transactions have materially improved the position of holders of NNN's $92 million 7.375% Series C preferred stock.
The Stable Outlook centers on NNN's strong liquidity position and Fitch's expectation that funds from operations will grow modestly in 2008. Internally-generated liquidity, the ownership of a large pool of unencumbered assets, and the recent exercise of the accordion feature under NNN's revolving line of credit indicate a liquidity position appropriate for the 'BBB' IDR level.
During the next 12-to-24 months, Fitch will monitor the performance of NNN's entire franchise, including the recently formed joint venture with an affiliate of Crow Holdings Realty Partners IV, L.P. Fitch will also monitor the broader retail environment, as Fitch believes that on a macroeconomic basis, comparable retail sales growth in 2008 will be weaker than 2007 levels.
For NNN to remain a 'BBB' rated credit, Fitch will look to NNN to maintain fixed charge coverage ratios demonstrated in 2007 year-to-date, continue to limit its mezzanine lending business and mortgage residual investments, and continue to own a mostly unencumbered property portfolio.
Formed in 1984, NNN is a fully-integrated real estate investment trust (REIT) that owns free standing retail properties leased primarily to retail tenants under long-term net leases. As of Sept. 30, 2007, NNN owned 876 Investment properties, located in 43 states, as well as 36 Inventory properties. As of Sept. 30, 2007, NNN had approximately $2.4 billion in undepreciated book assets and approximately $1.3 billion in undepreciated book equity.
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|Date:||Dec 5, 2007|
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