Fitch Revises First Industrial's Outlook to Positive; Affirms 'BB' IDR
NEW YORK -- May 8, 2013
Fitch Ratings has affirmed the credit ratings of First Industrial Realty
Trust, Inc. (NYSE: FR) and its operating partnership, First Industrial, L.P.
(collectively, First Industrial) as follows:
First Industrial Realty Trust, Inc.
--Issuer Default Rating (IDR) at 'BB';
--$125 million preferred stock at 'B+'.
First Industrial, L.P.
--IDR at 'BB';
--$450 million unsecured revolving credit facility 'BB';
--$474.2 million senior unsecured notes at 'BB'.
The Rating Outlook has been revised to Positive from Stable.
KEY RATING DRIVERS
The Positive Outlook is predicated on Fitch's expectation that fixed-charge
coverage will be sustained at a level consistent with a 'BB+' rating. The
company's industrial property portfolio is showing signs of recovery, as
evidenced by positive cash rent rollovers in 1Q2013 for the first time since
1Q2009 as well as rising occupancy rates. Credit strengths include low
leverage for the 'BB' rating category, a good liquidity position, and a
granular tenant base. Credit concerns include weakening financial flexibility
as evidenced by a smaller unencumbered pool and no recent demonstrated access
to the unsecured bond market. Unencumbered asset coverage remains strong for
the 'BB' rating.
Occupancy was 89.6% as of March 31, 2013, down slightly from 89.9% as of Dec.
31, 2012 but up from 87.9% as of Dec. 31, 2011. Importantly, cash rental rates
on new and renewal leases grew by 1.2% in 1Q2013 after several years of
declines. Along with positive rollover, cash basis same-store net operating
income increased by 2.3% in 1Q2013 after growth of 7.8% in 2012 and a decline
of 0.6% in 2011.
Fitch expects First Industrial to continue pushing rents as new supply remains
muted. Tenant retention was strong and averaged 74.8% for the trailing twelve
months ended March 31, 2013, after trending around 65% over the previous two
years. However, lease expirations are high in the aggregate in 2013 -2015,
with 11.2% of leases expiring in 2013, followed by 18.1% in 2014 and 14.8% in
IMPROVING FIXED-CHARGE COVERAGE
Fixed-charge coverage was 1.6x for the trailing twelve months ended March 31,
2013 pro forma for the redemption of preferred stock in April, compared with
1.5x in 2012 and 1.2x in 2011. Reduced fixed charges via debt repayment from
asset sales proceeds and retained cash flow, as well as a recently declining
weighted average cost of debt capital and preferred stock redemptions
contributed towards the increase. Fitch defines fixed-charge coverage as
recurring operating EBITDA less recurring capital expenditures less
straight-line rent adjustments divided by interest incurred and preferred
Fitch projects fixed-charge coverage will increase to the high 1x range over
the next 12-to-24 months based on organic and development-related growth,
which is more consistent with a 'BB+' rating. In a stress case not anticipated
by Fitch that reflects same-store declines of 2009 - 2010, coverage would
revert to 1.5x, which would be appropriate for a 'BB' rating.
LOW LEVERAGE FOR 'BB'
Net debt to recurring operating EBITDA was 6.4x as of March 31, 2013 pro forma
for the redemption of preferred stock in April, compared with 6.5x as of Dec.
31, 2012 and 7.2x as of Dec. 31, 2011. Debt repayment has outweighed flat
EBITDA levels, and Fitch projects leverage to fall to around 6.0x over the
next 12-to-24 months, which is low for the 'BB' rating category. In a stress
case not anticipated by Fitch that reflects same-store declines similar to
that of 2009-2010, leverage would revert to 7.5x, which would remain low for
an industrial REIT in the 'BB' category.
GOOD LIQUIDITY POSITION
The company's liquidity coverage ratio, calculated as liquidity sources
divided by uses, is 1.7x for the period April 1, 2013 to Dec. 31, 2014.
Liquidity sources include unrestricted cash, availability under the unsecured
revolving credit facility pro forma for the redemption of preferred stock in
April, and projected retained cash flows from operating activities after
dividends. Liquidity uses include consolidated and pro rata joint venture debt
maturities and projected recurring capital expenditures.
When including development cost to complete as a liquidity use, liquidity
coverage is 1.5x. Liquidity coverage improves to 1.9x assuming 80% of upcoming
secured debt maturities are refinanced.
First Industrial recently reinstated its common stock dividend, and its 1Q2013
AFFO payout ratio was approximately 51%, indicating moderate
internally-generated liquidity in that Fitch expects a portion of retained
cash to be used to fund development.
The portfolio consisted of 710 properties as of March 31, 2013 across both
coastal and inland regions. Top markets are Southern California (10.3% of
1Q2013 NOI), Chicago (7.7%), and Minneapolis/St. Paul (7.0%). In addition, the
tenant base has low concentration and spans the supply chain; as of March 31,
2013, top tenants were ADESA (2.8% of total rent), Ozburn-Hessey Logistics
(1.9%), and Quidsi (1.8%).
WEAKENING FINANCIAL FLEXIBILITY BUT STRONG UA-UD RATIO
First Industrial has placed mortgage debt on the portfolio over recent years
due to interest rate savings when compared with the company's pricing in the
unsecured bond market. Unencumbered assets represented 61.3% of total assets
as of March 31, 2013, compared with 64.3% as of Dec. 31, 2011 and 73.2% as of
Dec. 31, 2010. Fitch believes that the unencumbered pool is of weaker quality
than the encumbered portfolio.
Unencumbered assets (unencumbered property NOI divided by a stressed 9.5%
capitalization rate) covered net unsecured debt by 2.5x pro forma for the
redemption of preferred stock in April, which is strong for the 'BB' rating
and indicates good contingent liquidity.
The company has not accessed the unsecured bond market since 2007 but
continues to access to other sources of capital, including a common stock
offering in March 2013 for net proceeds of $132.1 million, several other
equity offerings, and a new credit facility agreement in 2011. The covenants
under the company's credit agreements do not restrict financial flexibility.
Going forward, debt maturities reflecting extension options at First
Industrial's option are manageable, as 0.8% of total debt pro forma for the
redemption of preferred stock in April matures in 2013, followed by 10.2% in
2014 and 12.6% in 2015. Over the next year, Fitch anticipates that First
Industrial will extend its unsecured credit facility but will not access the
unsecured bond market.
PREFERRED STOCK NOTCHING
The two-notch differential 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 titled 'Treatment and Notching of Hybrids in
Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's web
site at 'www.fitchratings.com', 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.
Taking into account First Industrial's lower asset quality and the smaller
size of its portfolio relative to other industrial REITs, the following
factors may result in an upgrade to 'BB+':
--Fitch's expectation of fixed charge coverage sustaining above 1.75x (pro
forma coverage is 1.6x);
--Growth in the unencumbered asset pool while maintaining an unencumbered
asset coverage ratio?based on capitalizing unencumbered NOI at a stressed rate
of 9.5% divided by net unsecured debt?of above 2.0x (this ratio was 2.5x as of
March 31, 2013).
The following factors may result in an upgrade to 'BBB-':
--Continued track record as an unsecured borrower;
--Fitch's expectation of fixed charge coverage sustaining above 2.0x and
leverage maintaining below 6.0x.
The following factors may result in negative momentum on the ratings and/or
--Further encumbering the portfolio to repay unsecured indebtedness;
--Fitch's expectation of fixed charge coverage sustaining below 1.5x;
--Fitch's expectation of net debt to recurring EBITDA sustaining above 7.0x;
--A sustained liquidity coverage ratio of below 1.0x.
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 Ratings 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
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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Sean Pattap, +1 212-908-0642
Fitch Ratings, Inc.
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