Fitch Ratings has affirmed STAG Industrial, Inc. and STAG Industrial Operating Partnership. L.P.'s Long-Term Issuer Default Ratings (IDRs) at 'BBB'.

In addition, Fitch has affirmed the underlying debt (credit facility, unsecured term loans and unsecured notes) held by STAG Industrial Operating Partnership. L.P. Fitch has assigned a rating of 'BBB' to the company's Series L, M, and N unsecured notes, which are also held by STAG Industrial Operating Partnership. L.P. The Rating Outlook is Stable.

Fitch's ratings for STAG reflect the company's credit strengths, including appropriate leverage and fixed-charge coverage metrics for the rating, a geographically diverse portfolio and adequate unencumbered asset pool. In addition, STAG has demonstrated consistent access to the unsecured private placement market and bank debt and has grown to a scale where it may look to access the public bond market prospectively.

STAG's portfolio has historically experienced stable performance with recent acceleration in the last couple years, supported by healthy e-commerce tenant demand and supply chain reconfiguration.

The affirmation reflects Fitch's view that the long-term rental income risk profile from the company's industrial portfolio remains relatively unchanged. Fitch expects STAG's leverage and fixed-charge coverage to operate through the forecast period with metrics appropriate for the 'BBB' rating.

Key Rating Drivers

Suitable Leverage: Fitch projects the company will sustain REIT leverage (net debt/recurring operating EBITDA) in the low 5x range over the rating horizon, within the company's stated long-term operating band of 5.0x-5.5x leverage target range that it expects for 2024. Fitch believes the company is committed to remaining within its stated policy and would look to reduce external growth measures to achieve this goal, if necessary. The company's leverage was 4.9x in 2023.

Improving Capital Access: STAG has established itself in the private placement market with multiple issuances since 2014 in transitioning to a predominantly unsecured borrowing strategy. However, STAG's unsecured debt capital access remains somewhat less established in comparison to higher rated peers, having yet to access the public bond market. The company continues to move toward an entirely unsecured debt strategy, with only $4 million of mortgage debt outstanding (less than 1% of total debt) remaining in its capital structure.

Solid Portfolio Diversification: STAG's portfolio has good geographical diversification, with no market comprising greater than 10% of annualized base rent (ABR). Chicago had the highest concentration of any market at 6.8% of ABR at 1Q24; the company's top 10 markets comprise only 39.0% of ABR. Likewise, STAG has strong tenant diversification. At 1Q24, its largest tenant, Amazon.com, Inc. represented 2.9% of ABR, and the top 10 tenants comprised only 9.8% of ABR.

In addition, STAG has reasonable industry diversification in its tenant base, although it has moderate concentration in the top industries represented, with air freight and logistics at 11.5% of ABR, containers and packaging at 8.3% of ABR and top 10 concentration of 59.5%. The company benefits from a stable portfolio; 59% of tenants have revenue of over $1 billion and 84% of tenants have revenue over $100 million.

Single-Tenant Focus in Smaller Markets: STAG has a differentiated strategy in its product and market focus compared with other public REIT peers in the industrial property sector. Its portfolio consists largely of single-tenant asset buildings versus multitenant buildings (24.8% of net rentable area) than what other most industrial REITs typically possess. This focus creates incremental risk due to a binary outcome in STAG's portfolio; each building is either 100% leased or 0% leased. Therefore, a partial impact of an individual tenant vacating its space does not exist in the same manner for STAG that it does for multitenant building owners, where the remainder of the building is still occupied.

Limited 'Core Market' Exposure: The company has limited exposure to many of what market participants generally consider 'core,' super-primary industrial and logistics markets, including Los Angeles/Inland Empire, Dallas-Fort Worth, Atlanta and New York/northern New Jersey. In contrast, STAG chooses from a larger set of industrial markets across all the CBRE Tier 1 markets (approximately 60 markets) in the US. Fitch views this as a credit negative, all else equal, given superior liquidity characteristics for industrial assets in these core markets in terms of financing capacity and transaction volumes.

However, the portfolio's granular geographic diversity should help reduce cash flow volatility. Approximately 75% of STAG's portfolio is in the CBRE Tier 1 markets; however, close to 50% of this is in markets more traditionally thought of as secondary markets or some of the smaller markets within the Tier 1 category. Nonetheless, STAG has shifted its portfolio toward larger markets and away from secondary/tertiary markets over the last few years.

Lower Organic Growth: Fitch expects STAG's same-store NOI to be in the 4%-5% range over the projection period, with anticipated continued solid leasing spreads. However, STAG's same-store NOI growth will likely trail its industrial REIT peers' due to the company's strategy of acquiring 100% occupied single-tenant industrial buildings and its market focus. Even so, the company's existing portfolio averages annual rent escalations of approximately +2.7% with new lease signings of typically at least 3.0%.

STAG is generally compensated for this occupancy loss through higher going-in yields on acquisitions. The company's leasing spreads and tenant-retention rates are generally in line with its peers; Fitch views these as alternative measures of portfolio quality and functionality.

Straightforward Business Model: STAG has not historically made material investments in ground-up development or unconsolidated joint venture partnerships, in contrast to many REIT peers. Nevertheless, it has more recently begun to maintain more of a development pipeline, although it remains modest with the amount to be funded at 1.5% of total gross assets at 1Q24 and mitigating risk by not being involved in the land entitlement process. While the company may pursue development more substantially, Fitch expects it to remain a relatively small component of operations.

Derivation Summary

STAG's ratings reflect its sound portfolio of industrial real estate that is well-distributed across the U.S., with a solid management team and leverage that is relatively low for the rating category. The company has a relatively simple business model, with minimal exposure to joint ventures or development risk.

These strengths are partially offset by lower anticipated organic growth than industrial peers due to STAG's single-tenant asset concentration and portfolio with a higher level of secondary market exposure. STAG exhibits stronger asset and market diversification, and potentially less volatility than industrial peers Rexford Industrial Realty, Inc. (BBB+/Stable) and Terreno Realty Corporation (BBB+/Stable), although has higher leverage than these two peers.

Fitch rates the IDRs of the parent REIT (STAG Industrial, Inc.) and subsidiary operating partnership (STAG Industrial Operating Partnership, L.P.) on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer Include

Same-store NOI annual growth in the 4%-5% range over the forecast horizon, driven by assumed stable occupancy after a 50bps decline in 2024 and 28% spreads in 2024, followed by 10-15% cash releasing spreads from 2025-2027;

Acquisitions of $400 million in 2024, followed by approximately $750 million annually through the remainder of the forecast period;

Development spending approximately $100-200 million annually through the forecast period;

Dispositions of $150 million a year over the forecast period;

No equity issuance in 2024 other than $72 million of remain forward equity carryover, followed by approximately $300 million of equity issuance per year in 2025-2027;

Debt issuances of approximately $450 million per year from 2025-2027 at 6.0% interest rate in 2025, 5.75% in 2026 and 5.5% in 2027. Revolving credit facility interest rate assumed to be approximately 6.0% in 2024, falling about 50bps in 2025 and 2026 and stabilizing to around 4.7% in 2027.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch's expectation of REIT Leverage (net debt/recurring operating EBITDA) sustaining below 5.0x;

Further expansion of STAG's unsecured debt capital access, including potentially accessing public debt markets;

Fixed-charge coverage sustaining above 4.0x.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

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 same-store NOI growth for seasoned acquisitions;

Fitch's expectation for leverage sustaining above 6.0x; Fixed-charge coverage sustaining below 3.0x.

Liquidity and Debt Structure

Healthy Liquidity: Fitch calculates that STAG's liquidity coverage is 3.7x for April 1, 2024-Dec. 31, 2025. This results in a liquidity surplus of approximately $1.03 billion. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under the revolving credit facility and expected retained cash flows from operating activities after dividend payments) divided by uses of liquidity (debt maturities and recurring capex), adjusting for known pro forma activities. STAG has minimal maturities in 2024 with a $50 million private placement note maturing in October 2024.

In 2025, the company's revolving credit facility matures, although it possesses two six-month extension options and Fitch expects the facility to be recast. In addition, STAG also has two unsecured notes totaling $175 million maturing in 2025. Fitch anticipates the company would repay this debt with additional unsecured borrowing and/or equity financing.

Adequate UA/UD Coverage: STAG has sufficient contingent liquidity from its unencumbered asset pool. Unencumbered asset coverage of net unsecured debt (UA/UD) is 2.1x when applying a stressed 10% capitalization rate to unencumbered NOI. Fitch expects that STAG will continue to unencumber assets as mortgages mature, although at this point the company only has $4.5 million of mortgages outstanding.

Manageable Payout Ratio: STAG historically retains a decent amount of internal cash flow compared with peers, as judged by the company's adjusted funds from operations (AFFO) payout ratio. STAG paid out 75.0% of its AFFO in 2023, retaining approximately $90 million in internal cash flow. The ratio has fluctuated between 75% and 93% in the 2014-2023 timeframe.

Issuer Profile

STAG is a REIT focused on single-tenant, industrial properties throughout the U.S. It owns 570 buildings in 41 states with approximately 113.0 million rentable sf. At March 31, 2024, its portfolio had 97.7% occupancy, with no tenant accounting for more than 3.0% of annualized base revenue.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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