NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings of STAG Industrial, Inc. (NYSE: STAG) and its operating partnership STAG Industrial Operating Partnership, L.P. (collectively, the company), including the Long-Term Issuer Default Ratings (IDR), at 'BBB'. Fitch has also assigned a 'BBB' rating to the previously announced $150 million committed term loan STAG plans to draw down during the fourth quarter of 2016 (4Q16). A full list of Fitch's rating actions follows at the end of this release.
KEY RATING DRIVERS
Fitch's ratings for STAG reflect the company's credit strengths, which include appropriate leverage and fixed charge coverage (FCC) metrics for the rating, strong liquidity, a sizable unencumbered asset pool and improving access to unsecured debt capital.
Fitch expects STAG to operate through the cycle with metrics that are appropriate for the 'BBB' rating, including net debt-to-annualized recurring EBITDA (adjusted for partial period investments) sustaining in the low-to-mid-5.0x range and FCC coverage at or above 3.0x.
STAG's policy leverage target is strong relative to similarly rated REITs, which is appropriate given its 75.9% portfolio weighting in company-defined secondary and tertiary markets that generally trade at higher cap rates.
Strategy, Growth Pressuring SSNOI
Fitch expects STAG's same store net operating income (SSNOI) to be flat to slightly positive through our 2018 projection period as occupancy losses offset solidly positive leasing spreads. STAG's SSNOI growth will likely trail its industrial REIT peers due to the company's strategy of acquiring 100% occupied single-tenant industrial buildings. As the company grows larger and its acquisitions season, the law of large numbers essentially pulls STAG's portfolio occupancy rate closer to market (roughly 93% to 95%).
STAG is generally compensated for this occupancy loss through higher going-in yields for acquisitions. The company's leasing spreads and tenant retention rates, which Fitch views as alternative measures of portfolio quality and functionality, are generally in-line with its peers.
STAG's cash SSNOI grew by 0.6% during 2Q16 and 2.0% for the first six months of the year. This follows positive 0.6% SSNOI growth during 2015, which reversed a negative trend that included SSNOI declines of 2.0% and 2.2% in 2014 and 2013, respectively. STAG retained 69% of its expiring leased square footage for the TTM ended June 30, 2016 - a level consistent with the company's long-term average.
Fitch projects the company will have net debt to EBITDA in the 5.0x to 5.5x range during the next three years on an annualized basis that includes a full-year's impact of earnings from projected acquisitions. STAG's leverage was 5.5x based on an annualized run rate of recurring operating EBITDA for the quarter ending June 30, 2016. The company's leverage was 6.1x including 50% equity credit for its perpetual preferred stock in total debt.
Improving Capital Access
STAG's issuances of senior unsecured notes in July 2014, December 2014, February 2015 and December 2015 have been important milestones in the company's transition to a predominantly unsecured borrowing strategy, evidencing broader access to unsecured debt capital. However, STAG's unsecured debt capital access remains somewhat less established than similarly rated peers pending an inaugural public unsecured bond offering and further private placement issuance. Prior to the company's inaugural private unsecured notes placement, STAG's unsecured borrowings were limited to three bank term loans, as well as drawdowns under the company's unsecured revolver.
Healthy Fixed Charge Coverage
Fitch expects the company's FCC to improve to the mid-3.0x range over the one-to-two-year Outlook horizon. STAG's recent $75 million preferred equity issuance has contributed to FCC declining to 3.0x from 3.4x in 2015. The company plans to redeem its 9% series A preferreds in November 2016, which will improve its FCC, all else equal. Fitch also expects the company to repay its $70 million 6.625% preferred stock when it becomes callable during 2018.
Strong Liquidity Profile
STAG's liquidity position is strong, with $386 million of availability under its committed, unsecured credit facility and $150 million of committed unsecured term loan borrowings that Fitch expects the company to access during 4Q16. STAG has minimal debt maturities until 2018 when $120 million of secured property-level mortgages mature.
STAG's unencumbered assets, defined as unencumbered NOI (as calculated in accordance with the company's unsecured loan agreements) divided by a stressed capitalization rate of 10%, covered its unsecured debt by 2.1x in 2Q16, which is solid for the 'BBB' rating.
STAG's substantial unencumbered asset pool is a source of contingent liquidity that enhances its credit profile.
Straightforward Business Model
STAG has not made investments in ground-up development or unconsolidated joint venture partnerships, in contrast to many of its industrial REIT peers. 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.
Secondary Market Locations
STAG's growth strategy centers on the acquisition of single-tenant industrial buildings, including warehouse/distribution properties (87.3% of annualized base rent [ABR]), manufacturing assets (9.2%) and flex/office space (3.5%). The company's emphasis on relative value has led it to acquire mainly properties in secondary markets throughout the United States. Such transactions typically range in price from $5 million to $50 million and have higher going-in yields and less competition from institutional buyers.
At June 30, 2016, secondary markets comprised the majority of STAG's portfolio (64.7% of annualized base revenue), followed by primary markets (24.1%) and tertiary markets (11.2%). The company defines primary markets as markets with approximately 200 million or more in net rentable industrial square footage. Secondary industrial markets have net rentable square footage ranging from approximately 25 million to approximately 200 million, and tertiary markets are those with less than 25 million square feet of net rentable industrial square footage.
The company has only minimal exposure to what market participants generally consider '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, all else equal, given superior liquidity characteristics for industrial assets in 'core' markets - both in terms of financing capacity and transaction volumes. However, the portfolio's granular geographic diversity should help reduce cash flow volatility.
Differentiated Strategy within Fragmented Market
STAG's current market share of its target markets is less than 1% of the $250 billion single-tenant industrial market, which provides growth opportunities in the company's target asset class. The company's management team focuses on the binary nature of the cash flow of individual, single-tenant, industrial properties and the opportunity for cash flow growth across markets, industries, segments and property sizes. This differentiated business model is thoughtful in its considerations of leasing, asset management, credit and capital market funding, which Fitch views favorably.
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 Stable Outlook reflects Fitch's expectation that STAG will maintain credit metrics over the rating horizon (typically one to two years) that are consistent with the 'BBB' rating, as well as our outlook for positive near- to medium-term industrial property fundamentals.
Fitch's key assumptions within the rating case for STAG include:
--STAG's SSNOI grows by 0%-1% per annum through 2018;
--Acquisitions of approximately $475 million, $550 million, $750 million in 2016, 2017, and 2018, respectively;
--Dispositions of $150 million during 2016 and none thereafter;
--Unsecured debt borrowings of $150 million, $225 million and $325 million during 2016, 2017 and 2018, respectively;
--Equity issuance of $275 million in 2016, $350 million in 2017, and $450 million in 2018;
--STAG repurchases its $69 million 9% Series A preferreds during 4Q16 and its $70 million 6.625% preferred stock when it becomes callable in 2018.
Although positive rating momentum is unlikely in the near- to medium-term, the following factors may have a positive impact on STAG's ratings:
--Leverage calculated on an annualized basis adjusted for acquisitions sustaining below 5.0x (leverage was 5.5x as of June 30, 2016 after giving effect to partial period acquisitions);
--Further development of STAG's unsecured debt capital access;
--Fixed charge coverage sustaining above 4.0x (coverage was 3.0x for the quarter ended June 30, 2016).
The following factors may have a negative impact on the company's ratings and/or Outlook:
--Indications that STAG's property portfolio is not competing effectively within its markets, which could include below-market leasing velocity and rent growth and weak SSNOI growth for seasoned acquisitions;
--Fitch's expectation for leverage sustaining above 5.5x;
--Fixed charge coverage sustaining below 3.0x;
--Unencumbered assets-to-net unsecured debt of below 2.0x (Coverage was 2.1x for the quarter ended June 30, 2016).
FULL LIST OF RATING ACTIONS
Fitch has affirmed STAG's ratings as follows:
STAG Industrial, Inc.
--Issuer Default Rating (IDR) at 'BBB';
--Preferred stock at 'BB+'.
STAG Industrial Operating Partnership, L.P.
--IDR at 'BBB';
--Senior unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB';
--Senior unsecured term loans at 'BBB'.
Fitch has also assigned a 'BBB' rating to STAG's $150 million committed term loan that we expect the company to access during 4Q16.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation and include operating income from discontinued operations;
--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $5 million of cash for working capital purposes which is otherwise unavailable to repay debt.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001