Fitch Rates First Industrial, L.P.'s $200MM Unsecured Term Loan Due 2021 'BB+'; Outlook Positive

Tue Feb 4, 2014 12:44pm EST

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(The following statement was released by the rating agency) NEW YORK, February 04 (Fitch) Fitch Ratings has assigned a 'BB+' credit rating to First Industrial, L.P.'s $200 million unsecured term loan. Fitch currently rates First Industrial Realty Trust, Inc. (NYSE: FR) and First Industrial, L.P. (collectively, First Industrial) as follows: First Industrial Realty Trust, Inc. --Issuer Default Rating (IDR) 'BB+'; --$75 million preferred stock 'BB-' (the company announced the redemption of these securities on Feb. 3, 2014). First Industrial, L.P. --IDR 'BB+'; --$625 million unsecured revolving credit facility 'BB+'; --$445.5 million senior unsecured notes 'BB+'. The Rating Outlook is Positive. On Jan. 29, 2014, First Industrial entered into an unsecured term loan agreement under which First Industrial, L.P. is the borrower and First Industrial Realty Trust, Inc. is the guarantor. The facility provides for a $200 million unsecured term loan and allows First Industrial, L.P. to request incremental term loans aggregating $100 million. The facility was initially priced at LIBOR plus 175 basis points. The company entered into interest rate swaps to effectively convert the LIBOR rate to a fixed interest rate of approximately 4.04% per annum based on the current LIBOR spread. The unsecured term loan matures on Jan. 29, 2021. The company will use the net proceeds from the unsecured term loan for general business purposes, including, without limitation, working capital needs, repayment of indebtedness and the acquisition and development of property. The financial covenants and all other major terms of the unsecured term loan agreement are identical to those of the company's $625 million unsecured revolving credit facility. KEY RATING DRIVERS Fitch upgraded First Industrial's IDR to 'BB+' on Dec. 17, 2013. The upgrade centered on Fitch's expectation that the company will improve its cash flow in excess of fixed-charges, primarily due to increasing occupancy and recovering rents across the company's granular industrial property portfolio. The upgrade further reflected First Industrial's improved financial flexibility as measured by increased revolving credit facility capacity and strong unencumbered asset coverage for the 'BB+' rating. The unsecured term loan improves the company's near- to medium-term liquidity position. The rating takes into account First Industrial's heavy debt maturities in 2016 and lease-up risk associated with the company's development pipeline. The Positive Outlook reflects that the company's credit metrics are approaching levels consistent with an investment-grade rating, coupled with management's commitment to maintaining leverage that is in line with an investment-grade credit. Improving Cash Flow Fitch anticipates that First Industrial will continue to increase portfolio occupancy due to favorable supply-demand dynamics in many of its markets. Occupancy on in-service space was 91.2% as of Sept. 30, 2013 compared with 89.9% as of Dec. 31, 2012 and 87.9% as of Dec. 31, 2011. However, First Industrial has been increasing occupancy to the detriment of rental rates; cash rental rates declined by 2.8% year-to-date ended Sept. 30, 2013 compared with a 4.7% decline in 2012 and 11.8% decline in 2011. First Industrial's in-place rents are below market rates, which should provide it with opportunities to increase rents in 2014 and 2015, when 16.8% and 16.1% of rents expire in 2014 and 2015, respectively. The company's cash flow is durable, absent tenant credit issues, as shown by a weighted average lease term of approximately six years as of Sept. 30, 2013. In addition, tenant retention on a square footage basis has been solid in the 70%-to-80% range each quarter since 1Q2012. Diversified Portfolio The portfolio is not overly dependent on any given region or tenant, with top markets as of Sept. 30, 2013 being Southern California (9.7% of 3Q2013 rental income), Minneapolis/St. Paul (7.5%), Central Pennsylvania (6.8%), Chicago (6.6%), and Dallas/Ft. Worth (6.3%). First Industrial's top tenants as of Sept. 30, 2013 were ADESA (2.8% of 3Q2013 rent), Quidsi (1.9%), Ozburn-Hessey Logistics (1.8%), General Services Administration (1.6%) and Harbor Freight Tools (1.2%). Despite this diversification by geography and tenant, First Industrial's portfolio has an older vintage and generally of weaker quality, as measured by average rent per square foot of $4.26. This compares with $4.81 for EGP, $4.96 for LRY's distribution portfolio, and $5.59 for PLD. Improved Financial Flexibility In July 2013, First Industrial amended and restated its unsecured revolving credit facility, increasing the capacity to $625 million from $450 million, extending the maturity to September 2017 (before a one-year extension option) from December 2014 and reducing the borrowing spread based on the company's current leverage ratio to LIBOR plus 150 basis points from LIBOR plus 170 basis points. In addition, a low AFFO payout ratio reflects the company's good financial flexibility. First Industrial's AFFO payout ratio was 47.7% in 3Q2013 compared with 46.8% in 2Q2013 and 51% in 1Q2013 (the first quarter post-crisis in which it paid a common stock dividend), indicative of strong internally generated capital. The company placed mortgage debt on the portfolio in recent years on many of the company's stronger assets; unencumbered assets represented 63.1% of total assets as of Sept. 30, 2013 compared with the high 90% range pre-crisis. However, unencumbered assets (3Q2013 unencumbered NOI divided by a stressed capitalization rate reflective of some adverse selection of 9.5%) covered net unsecured debt by 2.2x as of Sept. 30, 2013 pro forma for the unsecured term loan and redemption of preferred stock, which is strong for the 'BB+' rating. Improved Liquidity and Heavy 2016 Debt Maturities As of Sept. 30, 2013 liquidity coverage (calculated as liquidity sources divided by uses) is 2.0x for the period Oct. 1, 2013 to Dec. 31, 2015 and improves to 2.4x pro forma for the unsecured term loan and preferred stock redemption. Sources of liquidity include unrestricted cash, availability under the company's unsecured credit facility, and projected retained cash flows from operating activities after dividends and distributions. Uses of liquidity include debt maturities and projected recurring capital expenditures and development costs. After somewhat limited debt maturities in 2014 and 2015, when 9.6% and 2.7% of debt matures pro forma for the unsecured term loan, respectively, the company is facing heavy maturities in 2016, when 20.1% of pro forma debt matures. Development Lease-Up Risk The company is currently developing four properties in York, PA; Moreno Valley (Inland Empire), CA; Los Angeles County, CA; and Los Angeles, CA. Cost to complete is contained at 1% of gross asset value as of Sept. 30, 2013. However, the pipeline entails lease-up risk as all four projects are speculative projects that are currently unleased. Coverage and Leverage Warrant Positive Outlook The company's fixed-charge coverage ratio was strong for the 'BB+' rating at 1.9x in 3Q2013 pro forma for the unsecured term loan and preferred stock redemption (1.9x during 3Q2013 and 1.6x for the trailing 12 months ended Sept. 30, 2013) compared with 1.5x in 2012 and 1.2x in 2011. This trend was driven by improving fundamentals and therefore recurring operating EBITDA as well as lower fixed charges including preferred stock dividends. The company redeemed preferred stock during the 12 months ended Sept. 30, 2013 and announced the redemption of series F and series G preferred stock on Feb. 3, 2014. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures less straight-line rent adjustments divided by total cash interest incurred and preferred stock dividends. The company's Sept. 30, 2013 net debt to 3Q2013 recurring operating EBITDA was 6.7x pro forma for the unsecured term loan and preferred stock redemption (6.5x based on recurring operating EBITDA for the trailing 12 months ended Sept. 30, 2013) compared with 6.5x in 2012 and 7.2x in 2011. Pro forma leverage is strong for the 'BB+' rating. Fitch anticipates that low-single digit same-store NOI growth will result in fixed-charge coverage in the low-to-mid 2.0x range and leverage in the mid 6.0x range, which is consistent with an investment grade rating. In a stress case not anticipated by Fitch in which the company repeats same-store NOI declines experienced in 2009-2010, coverage would remain in the low 2.0x range but leverage could exceed 7.0x, which would be weak for an investment-grade rating. Preferred Stock Notching and Withdrawal 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. Fitch expects to withdraw the 'BB-' ratings on the securities following the redemption of these shares. RATING SENSITIVITIES 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 'BBB-': --Sustained strength in leasing fundamentals; --Fixed charge coverage sustaining above 2.0x (3Q'13 pro forma fixed-charge coverage is 1.9x); --Leverage sustaining below 7.0x (3Q'13 pro forma leverage was 6.7x). The following factors may result in negative momentum on the ratings and/or Outlook: --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 8.0x; --A sustained liquidity coverage ratio of below 1.0x. Contact: Primary Analyst Sean Pattap Senior Director +1-212-908-0642 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Michael Paladino, CFA Senior Director +1-212-908-9113 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: --'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Dec. 23, 2013); --'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013); --'Corporate Rating Methodology' (Aug. 5, 2013); --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013). Applicable Criteria and Related Research: Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis here Recovery Ratings and Notching Criteria for Equity REITs here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Criteria for Rating U.S. Equity REITs and REOCs 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. 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