Fitch also affirmed its ratings for STAG Industrial, Inc. and its operating partnership
STAG Industrial, Inc.
--Issuer Default Rating (IDR) at 'BBB-';
--IDR 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
The company has replaced some of the larger tenant vacancies, including the loss of Brown Shoe at its
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
Small Size But Improving Access to Capital
STAG's sale of
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
STAG had 82% availability under its
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
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
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
--Fixed charge coverage to sustaining above 3.0x (coverage was 3.3x as of
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'.
--'Corporate Rating Methodology,'
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors,'
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,'
--'Recovery Rating and Notching Criteria for Equity REITs,'
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
Source: Fitch Ratings
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