Fitch Upgrades First Industrial's IDR to 'BB'; Outlook Stable.
First Industrial Realty Trust, Inc. --Issuer Default Rating (IDR) to 'BB' from 'B+'; --Preferred stock to 'B+' from 'B-/RR5'.
First Industrial, L.P. --IDR to 'BB' from 'B+'; --$400 million unsecured credit facility (including a $200 million unsecured term loan and $200 million unsecured revolving credit facility) to 'BB' from 'BB/RR1'; --$757.6 million senior unsecured notes to 'BB' from 'BB-/RR3'; --$128.9 million senior unsecured exchangeable notes to 'BB' from 'BB-/RR3'.
The Rating Outlook is Stable.
The upgrade of First Industrial's IDR to 'BB' from 'B+' reflects the industrial REIT's improved long-term credit profile, including a reduction in net debt to recurring operating EBITDA via recent de-levering equity raises, an improved liquidity position, and management's continued focus on improving the overall quality of the portfolio via non-core asset sales. The two-notch upgrade also takes into account credit concerns including a fixed charge coverage ratio that is expected to be consistent with the 'BB' rating category and weaker portfolio performance relative to other industrial REITs. Although the company's unencumbered property pool provides contingent liquidity, the size of the unencumbered pool continues to decrease due to recent secured debt incurrence, making bondholders increasingly structurally subordinated and potentially limiting financial flexibility over the longer term.
As of March 31, 2011, First Industrial's net debt to recurring operating EBITDA ratio was 7.7 times (x), compared with 8.3x and 8.8x as of Dec. 31, 2010 and Dec. 31, 2009, respectively. Improvements stem from the company's reduction in debt via retained cash flow as well as a March 2011 common stock offering at $11.30 per share for net proceeds of approximately $100 million. The company priced another common stock offering on June 1, 2011 at $12.01 per share for net proceeds of approximately $100 million, thereby further reducing leverage on a pro forma basis to approximately 7.5x. Over the next 12-to-24 months, Fitch anticipates that leverage will remain in a range from 7.0x to 7.5x, which is solid for a 'BB' rating, principally due to further reductions in amounts outstanding under the company's credit facility via retained cash flow. Moreover, the company has an adequate risk-adjusted capitalization for the 'BB' rating category, with a risk-adjusted capital ratio of 1.3x as of March 31, 2011 and 1.4x pro forma for the recent common stock offering. In a more adverse case than currently anticipated by Fitch in which the company does not continue to utilize retained cash flow to repay debt, net debt to recurring operating EBITDA could sustain above 8.0x, which could result in negative rating momentum.
Recent capital raises have substantially improved First Industrial's near-term liquidity profile. As of March 31, 2011 and pro forma for recent transactions, the company's sources of liquidity divided by uses of liquidity result in a liquidity coverage ratio of 1.5x through Dec. 31, 2012. Sources of liquidity include unrestricted cash, availability under the company's unsecured credit facility pro forma for the $178.3 million secured debt financing in May 2011, $100 million common stock offering in June 2011, additional debt reductions, and the assumption of debt via a joint venture property acquisition, as well as projected retained cash flows after dividends. Uses of liquidity include debt maturities and projected recurring capital expenditures. Liquidity coverage would be 1.4x if the company recasts its unsecured credit facility for total borrowing capacity of $350 million and if 80% of upcoming secured debt is refinanced.
Fitch has a favorable view towards First Industrial's management team's continued focus on improving the overall quality of the portfolio via non-core asset sales. For example, First Industrial sold 13 properties at an in-place capitalization rate of 8.1% in 1Q2011 and 4 properties at an in-place capitalization rate of 7.8% in 2Q2011, generating total net proceeds of $31 million. At the same time, the company has pursued new investment opportunities including the acquisition of the company's net lease joint venture partner's 85% equity interest in a distribution center in Houston, TX.
The company's fixed charge coverage ratio (recurring operating EBITDA less recurring capital expenditures and straight-line rent adjustments divided by total interest incurred and preferred dividends) was 1.3x for the trailing twelve months ended March 31, 2011 compared with 1.2x in both 2010 and 2009. The modest improvement stems from a reduction in interest expense due to debt reduction despite an increase weighted average cost of debt capital and declining same-property NOI.
Same-store NOI declined by 0.9% in 1Q2011 after declining by 2.7% in 2010 and 3.5% in 2009 because of a combination of occupancy declines and rent roll downs. Portfolio occupancy reached a trough of 81.4% in 1Q2010 and increased to 84.7% in 1Q2011. Fitch projects that over the next 12-to-24 months, fixed charge coverage will approach 1.5x, driven by reduced interest expense stemming from the de-levering equity raises and flat same-store NOI in 2011, followed by low single-digit same-store NOI growth in 2012 as occupancy continues to recover. In a more adverse case than contemplated by Fitch that would result in sustained declines in same-store NOI, fixed charge coverage could sustain below 1.3x, which could result in negative rating momentum.
During the recent cycle, First Industrial's portfolio has underperformed a selected group of industrial REIT peers from a same-store NOI standpoint, and occupancy remains below industrial averages according to Property & Portfolio Research, Inc. (PPR). Rents also remain under pressure, with same-store average rent PSF of $4.16 in 1Q2011 compared with $4.51 in 1Q2010 and $4.47 in 1Q2009. Rent roll downs on new leases over the prior rate were negative 10% cash-on-cash in 1Q2011, compared with negative 17% in 4Q2010, and though roll down declines are moderating, Fitch expects continued roll downs over the near term, which should be offset by occupancy gains.
The company benefits from a broad tenant roster and geographically diversified portfolio that limit individual customer credit risk and market concentration. As of March 31, 2011, top tenants were Adesa at 2.3% of total rent, Ozburn-Hessey Logistics at 1.9%, and the U.S. Government's General Services Administration at 1.3%. Top markets are Minneapolis/St. Paul at 7.5% of total portfolio rental income, Detroit at 7.3%, and Chicago at 7.1%. These markets recently outperformed the broader U.S. warehouse markets in terms of NOI growth and vacancy rates were generally lower in these markets than in the broader U.S. warehouse markets, although 2010 NOI growth was negative in these markets.
The portfolio was 74.9% unencumbered as of March 31, 2011 and 67% unencumbered pro forma for the $178.3 million secured debt financing in May 2011, retirement of $27 million of mortgages in April 2011, and recent assumption of mortgage debt related to FR's joint venture property acquisition. The portfolio was 73.2% and 78.7% unencumbered as of Dec. 31, 2010 and Dec. 31, 2009, respectively, and prior to 2009, over 95% of the portfolio was unencumbered. The reduced size of the unencumbered pool has rendered bondholders increasingly structurally subordinated; secured debt to undepreciated book assets was 14.0% as of March 31, 2011, compared with 14.9% and 10.6% as of Dec. 31, 2010 and Dec. 31, 2009, respectively. That being said, unencumbered asset coverage of unsecured debt (based on unencumbered NOI divided by a capitalization rate of 8.5%) was 1.6x as of March 31, 2011 and 1.8x pro forma for post-March 31, 2011 transactions, which is good for a 'BB' IDR and provides moderate financial flexibility over the longer term.
The covenants under the company's credit facility do not currently limit First Industrial's financial flexibility and are not expected to limit flexibility when they become more restrictive in 4Q2011. At that time, the leverage test (total debt divided by total assets valued at a capitalization rate of 8.25%) decreases to 60% from 65%, the unencumbered asset coverage test increases to 1.6x from 1.3x, and the unencumbered debt service coverage test increases to 1.45x from 1.3x. The company also adheres to a fixed charge coverage covenant minimum of 1.2x among other covenants. In 1Q2011 per these covenants, leverage was 55.7%, unencumbered asset coverage was 1.77x, unencumbered debt service coverage was 1.92x and fixed charge coverage was 1.55x, all of which will improve pro forma for the June common stock offering.
The Stable Outlook reflects Fitch's view that absent further de-levering equity offerings over the next 12-to-24 months, First Industrial's leverage will remain between 7.0x and 7.5x, which is solid for a 'BB' rating, fixed charge coverage will approach 1.5x, which is appropriate for a 'BB' rating, unencumbered asset coverage of unsecured debt will remain approximately 1.8x, and liquidity coverage will remain above 1.0x.
The two-notch difference between First Industrial's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BB'. Based on Fitch Research on 'Equity Credit for Hybrids and Other Capital Securities,' dated Dec. 29, 2009, available on Fitch's Web site at www.fitchratings.com, First Industrial's preferred stock is 75% equity-like and 25% debt-like since it is perpetual and has no covenants but has a cumulative deferral option.
The following factors may result in positive momentum on the ratings and/or outlook: --Sustained positive trends in occupancy and same-store NOI; --Fixed charge coverage sustaining above 1.5x (coverage was 1.3x for the trailing twelve months ended March 31, 2011); --Growth in the unencumbered asset pool while maintaining an unencumbered asset coverage ratio (based on capitalizing unencumbered NOI at a rate of 8.5%) of between 1.5x and 2.0x.
The following factors may result in negative momentum on the ratings and/or outlook: --Fixed charge coverage sustaining below 1.3x; --Net debt to recurring EBITDA sustaining above 8.0x; --A sustained liquidity coverage ratio of below 1.0x.
Organized on August 10, 1993, First Industrial is a REIT headquartered in Chicago that owns, manages, acquires, sells, develops, and redevelops industrial real estate. As of March 31, 2011, FR had $3.4 billion in gross book assets, a total market capitalization of $2.9 billion, and an equity market capitalization of $1.3 billion. As of March 31, 2011, First Industrial owned 762 industrial properties located in 27 states in the United States and one province in Canada, containing an aggregate of approximately 67.9 million square feet of gross leasable area.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research: --Recovery Rating and Notching Criteria for Equity REITs (May 12, 2011); --Criteria for Rating U.S. Equity REITs and REOCs (March 15, 2011); --Corporate Rating Methodology (Aug. 16, 2010); --Equity Credit for Hybrids & Other Capital Securities - Amended (Dec. 29, 2009); --Rating Hybrid Securities (Dec. 29, 2009).
Applicable Criteria and Related Research: Criteria for Rating U.S. Equity REITs and REOCs http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 Corporate Rating Methodology http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 Equity Credit for Hybrids & Other Capital Securities - Amended http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 Rating Hybrid Securities http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086
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|Comment:||Fitch Upgrades First Industrial's IDR to 'BB'; Outlook Stable.|
|Date:||Jun 24, 2011|
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