Fitch Affirms National Retail Properties at 'BBB' Outlook Stable

Fitch Ratings has affirmed the Issuer Default Rating (IDR) and outstanding debt ratings for National Retail Properties as follows:

--IDR at 'BBB'

--Unsecured line of credit at 'BBB'

--Senior unsecured notes at 'BBB'

--Senior unsecured convertible notes at 'BBB'.

In addition, Fitch has downgraded the preferred stock rating of National Retail Properties, Inc. as follows:

--Preferred stock to 'BB+' from 'BBB-'.

The Rating Outlook is Stable.

Fitch said its affirmations reflect the consistent performance of NNN's portfolio given the current economic environment, as evidenced by a 96.3 percent occupancy and slightly positive net operating income (NOI) growth as of September 30, compared to September 30, 2008. The ratings affirmations also reflect NNN's solid fixed-charge coverage ratio (defined as recurring operating EBITDA less capital expenditures and straight-line rents, divided by interest expense, capitalized interest, and distributions on preferred stock) of 3.1 times (x) for the 12 months ended September 30, up from 2.9x for full year 2008.

The ratings are further supported by NNN's diversified free-standing retail and convenience store assets consisting of 1,004 investment properties spread throughout 44 states, primarily in the states of Texas, Florida, Illinois, North Carolina and Georgia. NNN's portfolio is comprised of over 200 tenants encompassing 35 industry classifications.

Additionally, NNN's solid risk-adjusted capitalization ratio of 1.4x, and unencumbered asset coverage of unsecured debt (based on undepreciated book assets) of 2.7x as of September 30, provides ample protection to unsecured bondholders. NNN also exhibits leverage metrics that are commensurate with its 'BBB' rating. NNN's net debt to recurring operating EBITDA ratio as of September 30, was 5.0x, down from 5.4x as of December 31, 2008.

The ratings also point to the strength of NNN's management team, and NNN's consistent and successful execution of its business strategy, which entails acquiring, owning, and investing in single-tenant retail properties, generally under long-term triple net leases.

Fitch views positively NNN's manageable debt maturity schedule, which contributes to a liquidity coverage ratio (total expected sources of liquidity divided by total expected uses of liquidity) of 3.2x for the period of September 30, through December 31, 2011. NNN's full availability under its $400 million unsecured line of credit, which recently replaced an existing facility in November 2009 is the main driver of NNN's liquidity surplus. NNN's debt maturity schedule, which results in only 16 percent of total debt maturing through 2011 (including $138.7 million of senior unsecured convertible notes Fitch expects to be put to NNN in 2011), and strong unencumbered asset to unsecured debt coverage provide additional financial flexibility and limit refinance risk over the next two years.

In addition, the financial covenants in the company's unsecured debt agreements do not limit NNN's financial flexibility.

Fitch's credit concerns revolve around the potential for tenant credit issues to negatively impact NNN's cash flows, due to a difficult retail environment that remains susceptible to restrained consumer spending and challenging economic conditions.

Additionally, Fitch remains concerned with NNN's relatively high exposure to the convenience store industry, an industry which is atypical of NNN's traditional retail lines of trade. However, Fitch notes that NNN's convenience store portfolio has provided positive returns to date and does not expect any adverse effects from NNN's exposure to this segment in the near term.

The two-notch difference between NNN's IDR and its preferred stock rating is consistent with Fitch's new hybrid securities rating criteria, and results in a downgrade of NNN's preferred stock by one notch. Based on Fitch's criteria reports, 'Rating Hybrid Securities' and 'Equity Credit for Hybrids and Other Capital Securities - Amended' both dated December 29, the company's cumulative preferred stock has loss absorption elements that would likely result in poor recoveries in the event of a corporate default, resulting in a two-notch difference between NNN's IDR and its preferred stock rating.

The Stable Outlook centers on Fitch's expectation that NNN will continue to exhibit solid credit metrics throughout 2010 and 2011. In addition, NNN's long-term triple net leases and manageable lease expiration schedule provide a stabilizing component to the portfolio. The Outlook also takes into account NNN's financial flexibility, strong liquidity position, and the diversity of NNN's portfolio and tenant base.

The following factors may have a positive impact on NNN's ratings:

--Fitch-defined fixed charge coverage were to sustain above 3.5x (fixed charge coverage was 3.1x for the 12 months ended September 30,);

--Total debt to annualized recurring EBITDA were to sustain below 4.5x (leverage was 5.0x as of Sept. 30,);

--NNN's unencumbered asset to unsecured debt coverage ratio on an undepreciated book basis were to sustain above 3.0x (coverage was 2.7x as of Sept. 30,).

The following factors may have a negative impact on NNN's ratings:

--Fitch-defined fixed charge coverage were to fall below 2.5x for several consecutive quarters;

--Total debt to annualized recurring EBITDA were to sustain above 6.0x;

--NNN's unencumbered asset to unsecured debt coverage ratio were to sustain below 2.3x;

--A liquidity deficit.

Relevant Fitch Criteria:

--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29.

--Rating Hybrid Securities, Dec. 29.

--Recovery Rating and Notching Criteria for REITs, Dec. 23.

--Corporate Rating Methodology, Nov. 24,

--Updated Criteria for U.S. Equity REIT Risk-Adjusted Earnings, Aug. 10.

--Updated Criteria for US Equity REIT Capital Standards, Nov. 11, 2007.

--Criteria for Rating U.S. Equity REITs, Aug. 9, 2007.

NNN is a real estate investment trust (REIT) formed in 1984. NNN's principal business consists of owning free standing retail properties that are leased primarily to retail tenants under long-term net leases. As of Sept. 30, NNN owned 1,004 Investment properties, located in 44 states, as well as 30 Inventory properties. As of Sept. 30, NNN had approximately $2.8 billion in undepreciated book assets and approximately $1.5 billion in undepreciated book equity.

Additional information is available at fitchratings.com.

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