NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' credit rating to STAG Industrial Operating Partnership, L.P.'s $150 million unsecured term loan that closed on March 27, 2014. Fitch currently rates STAG Industrial, Inc. (NYSE: STAG) and its operating partnership, STAG Industrial Operating Partnership, L.P. (collectively, STAG or the company) as follows:
STAG Industrial, Inc.
--Issuer Default Rating (IDR) 'BBB-';
--$139 million preferred stock 'BB'.
STAG Industrial Operating Partnership, L.P.
--$200 million senior unsecured revolving credit facility 'BBB-';
--$400 million senior unsecured term loans 'BBB-'.
The Rating Outlook is Positive.
On March 27, 2014, STAG Industrial closed on a new $150 million unsecured term loan with a seven-year term. The loan matures on March 21, 2021 and has a feature that allows the company to request an increase in total commitments to $250 million, subject to certain conditions. The company has 12 months to draw the funds and none were drawn at the closing.
At STAG's election, borrowings under the term loan bear interest at a floating rate plus a spread over either the Eurodollar rate or the base rate. The spread depends upon the company's leverage ratio and ranges from 1.70% to 2.30% for Eurodollar rate based borrowings and from 0.70% to 1.30% for base rate based borrowings. At March 21, 2014, the spread on the term loan was 1.70%.
KEY RATING DRIVERS
The ratings reflect STAG's credit strengths, which include low leverage and strong fixed charge coverage for the rating, excellent liquidity and its sizable unencumbered asset pool. These credit positives are balanced by the company's portfolio concentration in secondary industrial markets, short operating history as a public company and less diverse sources of capital pending evidence of STAG's ability to issue unsecured bonds.
STAG's leverage was 5.2 times (x) based on an annualized run rate of STAG's recurring operating EBITDA for the quarter ending Dec. 31, 2013, which is strong for the 'BBB-' rating. This compares with 6.3x on an annualized basis for the quarter ending Dec. 31, 2012, which was elevated due to debt issued late in the quarter. Adjusting fourth quarter of 2013 (4Q'13) earnings for the impact of partial period acquisitions would reduce STAG's leverage to 4.9x. Fitch's projections anticipate that the company will sustain leverage of approximately 5.0x during the next three years on an annualized basis that includes a full-year's impact of earnings from projected acquisitions.
STRONG FIXED-CHARGE COVERAGE
STAG's fixed charge coverage was 3.0x for the year ending Dec. 31, 2013 compared to 2.3x in 2012. Fitch expects the company's fixed charge coverage to sustain at roughly 3.0x through 2015.
STAG had 60% availability under its $200 million unsecured revolving credit facility as of Dec. 31, 2013 and no debt maturities until 2016. Moreover, STAG's unencumbered assets, calculated as unencumbered net operating income (NOI) divided by a stressed capitalization rate of 9%, covered its unsecured debt by 2.9x in 4Q'13, which is strong for the current ratings. Fitch views the company's sizable unencumbered asset pool as a source of contingent liquidity that enhances STAG's credit profile.
STRAIGHTFORWARD AND TRANSPARENT BUSINESS MODEL
STAG has not made, nor does its business model contemplate, investments in ground-up development or unconsolidated joint venture partnerships. The absence of these items helps simplify the company's business model, improve financial reporting transparency and reduce potential contingent liquidity claims, which Fitch views positively.
ADEQUATE TENANT GRANULARITY
STAG's tenant roster is less granular than its industrial REIT peers, but it is adequately diversified on an absolute basis and relative to equity REITs, generally. The company's largest tenant comprised 2.7% of annualized base revenue (ABR) as of Dec. 31, 2013 and its top five and 10 tenants represented 9.6% and 16.7%, respectively of ABR. Fitch expects STAG's tenant concentration to decrease as the company acquires additional assets.
SECONDARY MARKET LOCATIONS
STAG strategically pursues assets in secondary markets given higher going-in yields and less competition for purchases. The company has only minimal exposure to what are traditionally considered the 'core' U.S. industrial and logistics markets, which include Chicago, Los Angeles/Inland Empire, Dallas - Fort Worth, Atlanta and New York/Northern New Jersey. Fitch views this as a credit negative given superior liquidity characteristics for industrial assets in 'core' markets - both in terms of financing and transactions.
LIMITED PUBLIC COMPANY TRACK RECORD
STAG has a limited track record as a public company, having gone public in 2Q'11. This track record is balanced by 1) the homogeneity of industrial properties, 2) management's prior experience successfully managing STAG's predecessor as a private company that dates back to 2004 and 3) management's extensive real estate and capital markets experience.
UNPROVEN UNSECURED BOND ISSUER
STAG has demonstrated its ability to access the unsecured bank debt market but has yet to issue unsecured bonds. The company had $250 million of unsecured term loans outstanding as of Dec. 31, 2013 and two series of perpetual preferred securities. Fitch views the lack of demonstrated access to unsecured bonds as a credit negative given the enhanced financial flexibility that this market affords corporate borrowers.
PREFERRED STOCK NOTCHING
The two-notch differential between STAG's IDR and preferred stock rating is consistent with Fitch's criteria for a U.S. REIT with an IDR of 'BBB-'. 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.
The Positive Outlook is based on Fitch's expectation that STAG will demonstrate access to the unsecured bond market in the near-to-intermediate term, most likely through a private placement of senior unsecured notes. The Outlook also reflects Fitch's expectation that STAG will maintain leverage and coverage of approximately 5.0x and 3.0x, respectively, based on an annualized run rate of the most recent quarterly results, metrics that are consistent with a 'BBB' IDR.
The following factors may have a positive impact on STAG's ratings and/or Outlook:
--Demonstrated access to the unsecured bond market;
--Fitch's expectation for leverage to sustain below 5.5x (leverage was 5.2x as of Dec. 31, 2013);
--Fitch's expectation for fixed charge coverage to sustain above 3.0x (coverage was 3.1x as of Dec. 31, 2013).
The following factors may have a negative impact on the company's ratings and/or Outlook:
--Evidence of an inability by the company to access the unsecured bond markets;
--Fitch's expectation for leverage sustaining above 6.5x;
--Fixed charge coverage sustaining below 2.0x;
--A meaningful increase in the percentage of STAG's encumbered assets relative to gross assets.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,' Feb. 26, 2014;
--'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.
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure