Fitch Assigns Initial 'BBB-' IDR to STAG Industrial, Inc.; Outlook Positive

Tue Jun 4, 2013 4:11pm EDT

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(The following statement was released by the rating agency) NEW YORK, June 04 (Fitch) Fitch Ratings has assigned initial credit ratings to 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-'; --$175 million senior unsecured term loans '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 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. LOW LEVERAGE STAG's leverage was 5.2 times (x) based on an annualized run rate of STAG's recurring operating EBITDA for the quarter ending March 31, 2013. This compares with 7.0x on an annualized basis for the quarter ending Dec. 31, 2012, which was elevated due to debt issued late in the quarter. STAG's leverage is strong for the 'BBB-' rating. Adjusting 1Q13 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 in 6.3x to 5.0x range 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 annualized fixed charge coverage in 1Q13 was 3.1x compared to 2.6x in 4Q12 and 2.0x in 1Q12. Fitch expects the company's fixed charge coverage to dip to 2.6x in 2013 due to STAG's April 2013 preferred issuance and to improve to 3.2x by 2015. EXCELLENT LIQUIDITY STAG had 90% availability under its $200 million unsecured revolving credit facility as of March 31, 2013 and no debt maturities until 2016. Moreover, STAG's unencumbered assets, calculated as unencumbered NOI divided by a stressed capitalization rate of 9%, covered its unsecured debt by 2.7x in 1Q13. STAG's unencumbered leverage ratio was 4.1x during the same period. 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's 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 2.6% of annualized base revenue (ABR) as of March 31, 2013 and its top five and 10 tenants represented 10.1% and 18.4%, respectively. In contrast, the top one, five and 10 tenants for the industry, on average, comprised 2.1%, 7.3% and 11.5%. Fitch expects STAG's tenant concentration to decreases 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 2Q11. 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 $175 million of unsecured term loans outstanding as of March 31, 2013 and two series of trust 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. POSITIVE OUTLOOK The Positive Outlook is based on Fitch's expectation that STAG will demonstrate access to the unsecured bond market during the second half of 2013, 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. RATING SENSITIVITIES The following factors may have a positive impact on STAG's ratings and/or Outlook: --Demonstrated access to unsecured bond market; --Fitch's expectation for leverage to sustain below 5.5x (leverage was 5.2x as of March 31, 2013); --Fitch's expectation for fixed charge coverage to sustain above 3.0x (coverage was 3.1x as of March 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. Contact: Primary Analyst Stephen N. Boyd, CFA Director +1-212-908-9153 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Sean Pattap Senior Director +1-212-908-0642 Committee Chairperson Daniel Chambers Managing Director +1-212-908-0872 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 26, 2013. --'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, ' Dec. 13, 2012; --'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012; --'Corporate Rating Methodology,' Aug. 8, 2012; --'Parent and Subsidiary Rating Linkage,' Aug. 8, 2012. Applicable Criteria and Related Research: Criteria for Rating U.S. Equity REITs and REOCs here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Recovery Rating and Notching Criteria for Equity REITs – Effective May 12, 2011 to May 3, 2012 here Corporate Rating Methodology here Parent and Subsidiary Rating Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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