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Fitch Revises First Industrial's Outlook to Negative; Affirms 'BBB-' IDR

^{Published on 2008-12-18 13:39:21 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the Issuer Default Rating (IDR) and outstanding credit ratings of First Industrial Realty Trust, Inc. (NYSE:FR) as follows:

First Industrial Realty Trust, Inc.

--IDR at 'BBB-';

--$275 million preferred stock at 'BB+'.

First Industrial, L.P.

--IDR at 'BBB-';

--$500 million revolving credit facility at 'BBB-';

--$1.3 billion senior unsecured notes at 'BBB-';

--$200 million senior unsecured exchangeable notes at 'BBB-'.

In addition, Fitch has revised FR's Rating Outlook to Negative from Stable.

The Rating Outlook revision centers on Fitch's view that FR's overall earnings power is expected to be even weaker than previously anticipated in the near term, thus negatively impacting the company's creditworthiness.

On Dec. 17, 2008, FR updated its guidance range for 2008 funds from operations (FFO) per share/unit to $2.68 to $2.88 ($1.08 to $1.18 under the NAREIT definition). Previously, on Oct. 29, 2008, FR issued 2008 FFO per share/unit guidance of $3.17 to $3.37 ($1.40 to $1.60 under the NAREIT definition). The Negative Outlook points to Fitch's view that challenging market conditions will continue to make it more difficult for FR to engage in capital recycling activities and manage its portfolio.

The Negative Outlook also reflects the fact that FR's management team continues to be in a transitional period. The company announced the resignation of Michael Havala as chief financial officer on Dec. 17, and the company had previously announced the resignation of Michael Brennan as Chief Executive Officer on Oct. 22. In a Nov. 18 press release, Fitch noted that any changes in strategy at the executive level may not be effectively executed until a new Chief Executive Officer is found. The resignation of Mr. Havala as Chief Financial Officer has created a larger void at the executive level, which concerns Fitch. That being said, the appointment of Scott Musil (Chief Accounting Officer) as acting Chief Financial Officer will provide for some level of continuity as the company works through this transitional period.

The rating affirmations revolve around FR's flexible funding profile, staggered debt maturity schedule, solid occupancy of 93.7% as of Sept. 30, 2008, geographically diverse industrial property portfolio, and large pool of unencumbered assets representing 95.5% of total real estate as of September 30, 2008. FR's unencumbered asset pool gives the company financial flexibility in the current environment for the 'BBB-' IDR, as conditions remain challenging across the commercial real estate debt markets and as the economy remains in a recession.

The affirmations also point to FR's appropriate risk-adjusted capitalization for the 'BBB-' rating level, even though the company's risk-adjusted capital ratio has decreased from 1.4 times (x) as of Dec. 31, 2006 to 1.3x as of Dec. 31, 2007 to 1.2x as of Sept. 30, 2008. Additional credit strengths incorporated into the 'BBB-' IDR include FR's manageable lease expiration schedule, granular tenant roster of 1,956 in-service tenants as of Sept. 30, 2008, and existing joint venture platform.

As reflected in the Negative Outlook, Fitch believes that the company's debt service coverage ratios are low for the 'BBB-' rating level. Fitch-defined recurring EBITDA fixed charge coverage (recurring EBITDA before gains on sale, less non-incremental capital expenditures less straight-line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) was 1.0x and 1.1x for the trailing twelve months and quarter ended September 30, 2008, respectively.

In addition, FR's sources of liquidity before capital recycling activities (cash, availability from the company's revolving line of credit, retained cash flows from operating activities) less uses of liquidity (debt maturities, non-incremental capital expenditures) result in a liquidity shortfall of $85.8 million from Sept. 30, 2008 to Dec. 31, 2010. That said, FR has taken steps to improve liquidity by reducing its dividend and has also adjusted for an environment of lower capital recycling volume by reducing general and administrative expenses. On Dec. 17, 2008, FR further reduced corporate and regional office staffing and other overhead costs, and announced that it will discontinued its European operations, which Fitch views as a prudent step in managing costs.

In considering revising the Rating Outlook to Stable, Fitch would look to First Industrial to increase Fitch-defined recurring EBITDA fixed charge coverage to 1.5x or higher for several quarters; or to return FR-defined recurring EBITDA fixed charge coverage to 2.5x or higher for several quarters. Fitch would also favorably view a reduction in leverage on a debt-to-undepreciated book capital basis.

Fitch may downgrade the IDR, senior unsecured debt and preferred stock if unencumbered asset coverage (defined as unencumbered assets - calculated from company reported unencumbered real estate as a percentage of total real estate - divided by unsecured debt) were to fall to 1.6x or lower, or if Fitch-defined recurring EBITDA fixed charge coverage were to fall below 1.0x during 2009.

Organized in 1993, FR is an umbrella partnership real estate investment trust (REIT) that owns, manages, acquires, sells, develops and redevelops industrial real estate, predominantly bulk warehouses and light industrial facilities. As of Sept. 30, 2008, First Industrial had $3.8 billion in undepreciated book assets, $1.5 billion in undepreciated book equity and a total market capitalization of $3.7 billion. Also as of Sept. 30, 2008, FR owned 800 properties (including developments in process) containing an aggregate of 71.5 million square feet of gross leaseable area.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, [ 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.