In NNN triple net investing, the lease is only as valuable as the tenant signing it. A 20-year lease with a financially unstable tenant is worth far less than a 10-year lease with a national corporation carrying an S&P investment-grade credit rating. Understanding tenant credit quality is one of the most important skills an NNN investor can develop — and it directly impacts your property's value, financing options, and long-term income security.
What Is an S&P Credit Rating?
Standard & Poor's (S&P) is one of the three major credit rating agencies — alongside Moody's and Fitch — that assess the financial strength and default risk of corporations. Their ratings run from AAA (highest quality) down through the letter grades to D (default).
The critical dividing line in NNN investing is BBB-. Any rating of BBB- or higher is considered investment grade, meaning the corporation is considered financially stable with a low probability of default on its obligations — including your lease.
Investment Grade: BBB- and above (S&P scale). Ratings below BBB- are considered "speculative grade" or "high yield" — meaning higher risk and, in NNN investing, lower property values and reduced financing options.
S&P Credit Ratings for Common NNN Tenants
Below is a general guide to credit quality among commonly traded NNN tenants. Note that ratings can change; always verify current ratings before making investment decisions.
| Tenant | Category | S&P Rating (Approximate) | Investment Grade? |
|---|---|---|---|
| Walmart | Big Box Retail | AA | Yes ✓ |
| McDonald's | Restaurant | BBB+ | Yes ✓ |
| Home Depot | Big Box Retail | A | Yes ✓ |
| CVS Health | Pharmacy / Retail | BBB | Yes ✓ |
| Walgreens | Pharmacy / Retail | BB+ | No — Below Grade |
| Dollar General | Dollar Store | BBB | Yes ✓ |
| Starbucks | Restaurant | BBB+ | Yes ✓ |
| AutoZone | Auto Parts | BBB | Yes ✓ |
| O'Reilly Auto Parts | Auto Parts | BBB | Yes ✓ |
| Lowe's | Big Box Retail | BBB+ | Yes ✓ |
| Dollar Tree / Family Dollar | Dollar Store | BBB | Yes ✓ |
| Chipotle | Restaurant | BBB | Yes ✓ |
Note: Credit ratings are dynamic and reflect the rating agency's current assessment. Always verify current ratings through S&P, Moody's, or Fitch directly before any investment decision.
Why Tenant Credit Affects Cap Rates
NNN property cap rates and tenant credit quality have an inverse relationship: higher credit quality = lower cap rate. A Walmart-anchored NNN property might trade at a 4.5% cap rate, while a non-rated regional tenant NNN might trade at 7% or higher. The market assigns a premium — lower yield — to the safety of investment-grade income.
The Credit Premium in Practice
Consider two NNN properties, each priced at $3,000,000:
- Property A: Investment-grade tenant (BBB+), 15 years remaining, 4.75% cap rate = $142,500 annual rent
- Property B: Non-rated regional tenant, 15 years remaining, 6.5% cap rate = $195,000 annual rent
Property B generates more income — but carries significantly more risk. If the tenant closes stores or declares bankruptcy, you lose income and must re-lease, potentially at significant cost. Property A's income, while lower, is backed by a corporation with billions in revenue and a history of honoring leases through recessions and downturns.
Investment-Grade vs. Non-Rated: Which Is Right for You?
The answer depends on your investment objectives, risk tolerance, and the role the NNN property plays in your portfolio.
Choose Investment-Grade When:
- You are exchanging out of a management-intensive property via 1031 and want maximum income security
- You are financing the purchase and want favorable lender terms
- The NNN property is a cornerstone of your retirement income strategy
- You are estate planning and designating the property to heirs
- You prioritize principal protection over yield maximization
Higher Cap Rates May Be Appropriate When:
- The property is a franchise concept with a strong local operator history
- The location fundamentals are exceptionally strong
- You are diversifying across multiple NNN properties and can absorb some individual tenant risk
- You have experience in the commercial real estate sector and understand tenant business models
Important: Walgreens — despite being one of the most traded NNN tenants — had its credit rating downgraded below investment grade by S&P. This is a reminder that even major national brands can lose investment-grade status. Always check current ratings, not historical assumptions.
Beyond Credit: Other Tenant Quality Factors
S&P ratings are a powerful screening tool, but NNN investors should also evaluate:
- Store count and growth trajectory — A growing brand reinvesting in new locations signals financial health
- Category resilience — Essential services (pharmacies, auto parts, dollar stores, banks) have proven recession-resistant
- Lease guarantee structure — Corporate guaranteed leases (signed by the parent company) are stronger than franchisee-guaranteed leases
- Sales performance — High-volume individual locations are less likely to be closed in a strategic restructuring
At Only NNN Properties, we analyze tenant credit quality for every property in our inventory. Contact us to receive a curated list of NNN properties with investment-grade national tenants matched to your investment criteria.
