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Business and Finance
Mon, November 15, 2010 Fitch Removes First Industrial's Ratings from Watch Negative & Affirms IDR at 'B+'; Outlook Stable
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has removed from Rating Watch Negative and subsequently affirmed the following ratings for First Industrial Realty Trust, Inc. (NYSE: FR) and its operating partnership, First Industrial, L.P. (collectively, First Industrial):
First Industrial Realty Trust, Inc.
--Issuer Default Rating (IDR) at 'B+'.
First Industrial, L.P.
--IDR at 'B+';
--$400 million unsecured credit facility (including a $200 million unsecured term loan and $200 million unsecured revolving credit facility) at 'BB/RR1';
--$751.1 million senior unsecured notes at 'BB-/RR3';
--$145.7 million senior unsecured exchangeable notes at 'BB-/RR3'.
Fitch has also upgraded First Industrial Realty Trust, Inc.'s $275 million preferred stock to 'B-/RR5' from 'CCC/RR6'.
The Rating Outlook is Stable.
The removal of the ratings from Negative Rating Watch is driven by Fitch's view that there is currently a limited likelihood of a covenant violation or deferral of preferred stock dividends by First Industrial.
On Oct. 25, 2010, First Industrial announced that it amended its unsecured revolving credit facility agreement. It paid down $100 million of borrowings, such that the credit facility now totals $400 million including a $200 million term loan and $200 million revolving facility. The amended agreement reduced the fixed charge coverage covenant to 1.2 times (x) from 1.5x until September 2011, after which it increases to 1.25x until maturity in September 2012 (although the company has four waivers to remain above 1.2x until maturity), and also reduced the unencumbered asset coverage covenant to 1.3x from 1.6x until September 2011, after which it reverts to 1.6x until maturity in September 2012. The company is in compliance with all new covenants such that it has enhanced financial flexibility to sell non-core assets (i.e., vacant properties or assets outside of major markets), including selling assets at a loss, or to refinance debt maturities.
The 'B+' IDR takes into account First Industrial's credit strengths including improved financial flexibility following the recent amendment to its unsecured credit facility agreement. The ratings further reflect that declines in same-property net operating income (NOI) across the company's portfolio are moderating because of increasing occupancy rates and that portfolio operating performance is bottoming out in the near term. These credit strengths are offset by a fixed charge coverage ratio that remains consistent with the higher end of the 'B' rating category, a constrained liquidity position, and unencumbered asset value that provides modest downside protection to bondholders. First Industrial's ability to sell assets for proceeds of $250 million to $300 million before September 2012 is uncertain, and the risk of a covenant violation remains since the unencumbered asset coverage covenant under the amended credit agreement reverts to 1.6x after September 2011.
The Stable Outlook reflects the likelihood that First Industrial's credit metrics will remain consistent with a 'B+' IDR over the near term.
First Industrial actively leased space during the third quarter of 2010 (3Q'10), increasing in-service portfolio occupancy meaningfully to 83.6% as of Sept. 30, 2010 from 82.1% as of June 30, 2010. Year-over-year occupancy was also up from 81.7% as of Sept. 30, 2009. Although rents remain under pressure with weighted average rental income per square foot declining to $4.36 in 3Q'10 from $4.47 in 2Q'10 and $4.51 in 3Q'09, same-store declines in NOI on a cash basis are moderating due to more occupied space. Year-over-year same store cash NOI declined by 0.1% in 3Q'10 after declining by 1.7% and 7.2% in 2Q'10 and 1Q'10, respectively.
While occupancy is poised to continue improving because of limited new industrial property supply throughout the recent economic downturn, fixed charge coverage will improve modestly but remain consistent with a 'B+' IDR, absent significant deleveraging equity raises. The company's fixed charge coverage ratio (defined as recurring operating EBITDA less recurring capital expenditures less straight-line rent adjustments divided by total interest incurred and preferred stock dividends) was 1.2x for the trailing 12 months ended Sept. 30, 2010. Fixed charge coverage was 1.4x in 3Q'10 and 2Q'10 due to reduced operating expenses and general and administrative expenses along with lower interest expense via senior unsecured debt repurchases and redemptions. For 2011 and 2012, Fitch projects that fixed charge coverage will be approximately 1.2x to 1.3x due to a bottoming out of same-store NOI declines, offset by potential reduced NOI through contemplated sales of non-strategic assets.
First Industrial improved its near-term financial flexibility following the recent amendments to the company's unsecured credit facility agreement, but overall liquidity remains constrained. The company's sources of liquidity (unrestricted cash, availability under the unsecured credit facility pro forma for the $100 million pay down following the amended agreement, projected retained cash flows from operating activities after preferred stock dividends) divided by uses of liquidity (pro rata debt maturities, projected recurring capital expenditures) for Oct. 1, 2010 to Dec. 31, 2012 result in a liquidity coverage ratio of 0.4x. The company's liquidity position remains pressured due to limited borrowing capacity under the unsecured credit facility, offset by organic cash flow retention as the company is not currently paying a common stock dividend. Liquidity coverage would be 0.5x if 80% of upcoming secured debt maturities are refinanced. Moreover, absent proceeds from asset sales used to repay indebtedness, the company faces refinance risk in 2012 given significant amounts that remain outstanding under the unsecured credit facility that matures September 2012.
First Industrial's real estate portfolio is 73.1% unencumbered as of Sept. 30, 2010 compared with 85.4% as of Sept. 30, 2009. Unencumbered asset coverage of unsecured debt was 1.57x as of Sept. 30, 2010 per the covenants in the company's new unsecured line of credit agreement, which employs an 8.5% capitalization rate to derive the value of unencumbered assets and has a covenant limit of 1.3x. The previous unsecured line of credit agreement limit was 1.6x and employed a 7.75% capitalization rate to derive the value of unencumbered assets. However, unencumbered asset coverage was 1.62x pro forma for the $100 million paydown of unsecured debt via the amended agreement. While the covenants under the amended agreement do not currently restrain First Industrial's financial flexibility, unencumbered asset value provides modest downside protection to bondholders. That being the case, if the company is unable to sell assets to repay debt to the extent contemplated, there is a risk that the company could be closer to the unencumbered asset coverage covenant under the amended credit agreement, which reverts to 1.6x after September 2011.
First Industrial's credit metrics are expected to remain consistent with a 'B+' IDR. The company's risk-adjusted capital ratio at a 'B' rating category stress was 1.9x as of Sept. 30, 2010, which is solid for the rating category, compared with 1.8x and 1.5x as of Dec. 31, 2009 and Dec. 31, 2008, respectively. First Industrial's leverage on a net debt to recurring operating EBITDA basis was also strong for the 'B+' IDR at 8.6x as of Sept. 30, 2010 compared with 9.1x and 12.4x as of Dec. 31, 2009 and Dec. 31, 2008, respectively. Fitch projects that over the next two years leverage will approach 8.0x due to expected paydowns of the company's unsecured credit facility via retained operating cash flow as the company is not currently paying a common stock dividend.
The Stable Outlook takes into account First Industrial's geographically diversified industrial real estate portfolio and granular tenant roster. The company's top five markets by rental income as of Sept. 30, 2010 were Detroit (7.3%), Minneapolis/St. Paul (7%), Chicago (6.1%), Dallas/Ft. Worth (6.1%), and Los Angeles (6.1%), while no other market comprised more than 6% of total rental income. This insulates First Industrial from individual market fundamentals but exposes the company to various areas outside of key logistics corridors, which Fitch views less favorably. As of Sept. 30, 2010, no individual tenant contributed more than 2.4% of total rental income, which Fitch views positively from a tenant credit risk standpoint.
In accordance with Fitch's Recovery Rating methodology, Fitch assigns Recovery Ratings to obligations of issuers with an IDR of 'B+' or lower. At IDR levels of 'B+' or lower, there is greater probability of default, so the impact of recovery prospects on issue specific ratings becomes more meaningful and is more explicitly reflected in the ratings dispersion relative to the IDR. Although a covenant breach is no longer likely due to the amended terms of the unsecured credit facility, the company's inability to sell assets to pay down debt may position the company closer to its revised covenants after September 2011. Therefore, unsecured bondholders continue to face adverse selection risk relative to the lenders under the unsecured credit facility in the absence of First Industrial reaching its asset sales targets. As such, the ratings for the company's unsecured credit facility have been at 'BB/RR1' and ratings for the unsecured notes have been at 'BB-/RR3'.
The upgrade of First Industrial's preferred stock rating to 'B-/RR5' from 'CCC/RR6' reflects that the risk of a preferred stock dividend deferral is no longer a real possibility, but that recoveries for preferred stock would likely be weak given default. Based on Fitch's criteria report, 'Equity Credit for Hybrids & Other Capital Securities', the company'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 in a going concern. Net debt plus 25% of preferred stock to recurring operating EBITDA was 8.9x as of Sept. 30, 2010, compared with 9.5x as of Dec. 31, 2009.
The following factors may positively impact the ratings and/or Outlook:
--If the company's fixed charge coverage ratio sustains above 1.3x (for the 12 months ended Sept. 30, 2010, fixed charge coverage was 1.2x);
--If the company's net debt to recurring operating EBITDA ratio sustains below 8.5x (as of Sept. 30, 2010, leverage was 8.6x);
--A liquidity surplus.
The following factors may negatively impact the ratings and/or Outlook:
--An inability to raise capital principally through asset sales to address near-term debt maturities;
--If the company's fixed-charge coverage ratio sustains below 1.2x;
--If the company's net debt-to-recurring operating EBITDA ratio sustains above 9.0x;
Organized on Aug. 10, 1993, First Industrial is a REIT headquartered in Chicago that owns, manages, acquires, sells, develops, and redevelops industrial real estate. As of Sept. 30, 2010, First Industrial had $3.5 billion in gross book assets, a total market capitalization of $2.5 billion, and an equity market capitalization of $625.5 million. As of Sept. 30, 2010, First Industrial owned 778 industrial properties located in 28 states in the United States and one province in Canada, containing an aggregate of approximately 68.9 million square feet of gross leasable area.
Additional information is available at '[ www.fitchratings.com ]'.
Applicable Criteria and Related Research:
--Corporate Rating Methodology, Aug. 13, 2010;
--Criteria for Rating U.S. Equity REITs and REOCs, April 16, 2010;
--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;
--Rating Hybrid Securities, Dec. 29, 2009;
--Recovery Rating and Notching Criteria for REITs, Dec. 23, 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=510465 ]
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 ]
Recovery Rating and Notching Criteria for REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
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