Fitch Rates STAG's $50MM Senior Unsecured Notes 'BBB-'; Outlook Positive
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to STAG Industrial Operating Partnership, L.P.'s $50 million unsecured notes issued through a private placement on July 1, 2014. The notes have a 12-year term and bear interest at a fixed rate of 4.98%.
Fitch also affirmed its ratings for STAG Industrial, Inc. and its operating partnership STAG Industrial Operating Partnership, L.P. (hereafter STAG or the company) as follows:
STAG Industrial, Inc.
--Issuer Default Rating (IDR) at 'BBB-';
--$139 million preferred stock at 'BB'.
STAG Industrial Operating Partnership, L.P.
--IDR at 'BBB-';
--$200 million senior unsecured revolving credit facility at 'BBB-';
--$300 million senior unsecured term loans at 'BBB-'.
The Rating Outlook is Positive.
KEY RATING DRIVERS
The ratings reflect STAG's credit strengths, which include low leverage and strong fixed charge coverage for the rating, excellent liquidity, a sizable unencumbered asset pool and improving access to capital, including unsecured private placements and term loans and common equity via ATM programs.
These credit positives are balanced by the company's portfolio concentration in secondary industrial markets and short operating history as a public company.
The Positive Outlook reflects the upward momentum in STAG's credit profile, including rapid organizational growth, improving fixed-charge coverage and enhanced access to unsecured debt capital - all in the context of leverage sustaining in the low 5.0x range.
STAG has achieved many of the rating sensitivities it has identified as potentially leading to positive ratings momentum. However, the Positive Outlook captures pending additional seasoning in the company's operating portfolio and metrics. Specifically, the agency will watch closely for evidence of stabilization in the company's same-store net operating income (NOI) growth following a period of unanticipated weakness during most of 2013.
Internal Growth to Stabilize and Improve
STAG's cash same-store NOI declined for the TTM ended June 30, 2014 including year-over-year decreases of 5.5% decline in third quarter 2013 (3Q'13), 0.7% in 4Q'13, 4.9% in 1Q'14 and 1.2% in 2Q'14. The company attributes the same-store weakness to unusually low tenant retention due to a period of heightened corporate change and, to a lesser extent, the harsh weather during the 2013-2014 winter season.
The company has replaced some of the larger tenant vacancies, including the loss of Brown Shoe at its Sun Prairie, WI, asset that was backfilled with minimal downtime. However, free rent granted under selected replacement tenant leases has been a near-term drag on cash same store NOI growth that should abate as these concessions burn off.
Fitch projects same store NOI growth of 0.5% in 2014, 2.9% in 2015 and 3.3% in 2016 improved occupancy and positive GAAP rent spreads for new and renewal leases. The agency's projections assume stabilization and improvement in the company's tenant retention ratios during the second half of 2014 through 2016, towards a more normalized level of between 70% and 80%.
STAG's leverage was 5.2 times (x) based on an annualized run rate of STAG's recurring operating EBITDA for the quarter ending June 30, 2014, which is strong for the 'BBB-' rating. This compares with 5.5x on an annualized basis for the quarter ending Dec. 31, 2013 and 5.3x for the quarter ending June 30, 2013. Adjusting 2Q'14 earnings for the impact of partial period acquisitions would reduce STAG's leverage to 5.0x. 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.
Small Size But Improving Access to Capital
STAG's sale of $100 million of private placement unsecured notes (including $50 million under a delayed draw set for Oct. 1, 2014) is an important milestone in the company's transition to a predominantly unsecured borrowing strategy that evidences broader access to unsecured debt capital. 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. However, Fitch continues to view STAG as a relatively unseasoned unsecured bond issuer pending further private placement issuance.
Strong Fixed-Charge Coverage
Fitch expects the company's fixed charge coverage to sustain in the low 3.0x through 2016. The low interest rate environment and higher capitalization rates on class B industrial properties in secondary markets should allow STAG to continue deploying capital on a strong spread investing basis. STAG's fixed charge coverage was 3.3x for the quarter ended June 30, 2014 and 3.1x and 2.6x for the years ending Dec. 31, 2013 and 2012, respectively.
STAG had 82% availability under its $200 million unsecured revolving credit facility as of June 30, 2014 and no debt maturities until 2016. Moreover, STAG's unencumbered assets, defined as unencumbered net operating income (NOI) (as calculated in accordance with the company's seven-year unsecured term loan agreement) divided by a stressed capitalization rate of 10%, covered its unsecured debt by 2.8x in 2Q'14, which is strong for the current ratings. The company's substantial unencumbered asset pool is a source of contingent liquidity that enhances STAG's credit profile.
Straightforward Business Model
STAG has not made 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. While the company may selectively pursue the acquisition of completed build-to-suit (BTS) development projects in the future, Fitch would anticipate only a moderate amount of such activity by STAG on an ongoing basis. Moreover, Fitch views the acquisition of completed BTS development projects as lower risk given the inherent non-speculative nature of this activity.
Fitch views management favorably due to its successful track record in executing its single-tenant industrial portfolio acquisition strategy, as well as its extensive real estate capital markets experience. Fitch does not expect the company's recent appointment of Geoff Jervis as Chief Financial officer to result in a change in financial policies. Fitch anticipates that Mr. Jervis will continue to broaden STAG's unsecured debt base beyond bank debt and that the company will remain committed to its low-leverage strategy.
Secondary Market Locations
STAG's strategy centers on the acquisition of individual Class B, single tenant industrial properties (warehouse/distribution and manufacturing assets) predominantly in secondary markets throughout the United States by sourcing third party purchases and structured sale-leasebacks. Such transactions typically range in price from $5 million to $50 million and have higher going-in yields, stronger internal rates of return, and less competition from other buyers. 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.
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 for stabilization and improvement in the company's cash same-store NOI growth over the rating horizon, coupled with Fitch's expectation that STAG will maintain leverage and fixed-charge coverage of approximately 5.0x and 3.0x on a run rate basis, metrics that are consistent with a 'BBB' IDR.
The following factors may have a positive impact on STAG's ratings:
--Stabilization, followed by sustained improvement in STAG's tenant retention and same-store NOI growth is Fitch's primary consideration for positive ratings momentum;
--Continued access to the unsecured bond market;
--Leverage calculated on an annualized basis adjusted for acquisitions sustaining below 5.5x (leverage was 5.0x as of June 30, 2014);
--Fixed charge coverage to sustaining above 3.0x (coverage was 3.3x as of June 30, 2014).
The following factors may have a negative impact on the company's ratings and/or Outlook:
--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:
--'Corporate Rating Methodology,' May 28, 2014;
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,' Feb. 26, 2014;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' Dec. 23, 2013;
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 19, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs