NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Rexford Industrial Realty, Inc. (NYSE: REXR) and its operating partnership Rexford Industrial Realty, L.P. (Rexford or the company), including the company's Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Fitch's ratings incorporate Rexford's credit strengths, including its appropriate leverage (adjusting for partial period investments) and fixed charge coverage (adjusted for its currently high percentage of variable rate debt), strong liquidity position, diversified tenant mix across the company's Southern California-focused industrial property portfolio, and limited development risk.
Weaker elements of the credit include REXR's short public company track record, less established access to unsecured debt capital, and concentrated lease maturity and debt maturity schedules.
The Stable Outlook reflects Fitch's expectations that leverage, FCC and the coverage of unsecured debt by unencumbered assets will remain at levels appropriate for a 'BBB-' IDR.
Appropriate Leverage and Coverage
Fitch anticipates that leverage will rise from currently low levels and remain appropriate for the 'BBB-' rating. REXR has funded its recent acquisitions primarily with common equity and also from proceeds from non-core asset sales. Fitch primarily considers Rexford's leverage on an adjusted basis that includes a full period contribution of in-place net operating income (NOI), given the company's smaller asset base.
Fitch projects that REXR's leverage will increase, but sustain in the mid-6.0x range over the next 12 - 24 months after adjusting for partial period acquisitions contemplated during the forecast period. There is tolerance within the ratings to exceed Fitch's 6.5x leverage target for Rexford at the 'BBB-' rating for acquisitions with the expectation that the company deleverages its balance sheet to a level appropriate for the rating within six months. Fitch defines leverage as debt, net of readily available cash, divided by recurring operating EBITDA.
REXR's leverage was 5.2x for the trailing 12 months (TTM) ended March 31, 2015, which is strong for the 'BBB-' rating. REXR's leverage was 9.2x and 6.9x during 2014 and 2013, respectively.
Fitch projects that Rexford's FCC will remain strong but decrease to mid-3x through 2016 as the company refinances floating rate debt with longer-term fixed-rate borrowings. Coverage would remain solid for a 'BBB-' rated REIT with Rexford's asset profile at the lower ratio Fitch projects. Rexford's FCC was 5.3x for the TTM ended March 31, 2015, compared with 5.1x and 5.8x in 2014 and 2013, respectively.
The company's coverage metrics benefit from a high level of variable rate debt in its capital stack. Eighty two percent of REXR's debt was variable rate at March 31, 2015. The variable rate percentage drops to 34% assuming all of the company's swaps were effective at quarter end and should decline to roughly 15% following the private placement notes issuance and related debt refinancings (see below).
Fitch defines FCC as recurring operating EBITDA less straight-line rents and recurring capital expenditures, divided by total cash interest incurred.
Strong Liquidity
The company's liquidity coverage ratio is strong at 5.1x for the period from April 1, 2015 through Dec. 31, 2016 pro forma for the $100 million unsecured notes issuance. Fitch defines liquidity coverage as sources of capital divided by uses.
Sources of liquidity include $44.5 million of readily available cash, 100% availability under the company's $200 million unsecured revolving credit facility, and $30 million of projected retained operating cash flows after dividends and distributions. Uses of liquidity include $52.8 million of debt maturities, and $23.4 million of recurring, development and redevelopment capital expenditures.
The company's strong liquidity profile is helped by its small development pipeline. As of March 31, 2015, REXR's wholly owned development pipeline had an estimated cost of $14.9 million ($13.5 million unfunded) or 1.4% of its gross undepreciated assets (1.2% unfunded).
Good Tenant Diversification
Rexford has good tenant diversification with approximately 1,000 tenants and over 1,100 leases. The company's top five largest tenants represented 8.5% of 1Q'15 annualized base rent (ABR), and its largest tenant, Cosmetic Laboratories of America, was 2.3% of ABR. Rexford's tenant granularity has improved, but remains below its larger industrial REIT peers.
Rexford focuses on tenants with needs for smaller industrial space, typically in the range of 5,000 to 50,000 square feet, enabling it to maintain a large tenant roster which minimizes reliance on any one customer. Many tenants are small local businesses and sole proprietors that likely have less developed access to capital. This distinguishes Rexford from most other investment grade industrial peers that benefit from a higher percentage of large, corporate investment grade tenants.
Below-Market Occupancy
Fitch views Rexford's portfolio vacancy of 10.8% at 1Q'15 as a by-product of the company's value-add acquisition strategy that should allow for above-average internal growth through lease-up of vacant space as the economy strengthens (including improved capital access for REXR's core small and mid-size business tenants) and given tight industrial fundamentals in its core SoCal markets.
Light industrial vacancy in LA (50% of ABR) was 2.8% at March 31, 2015 according to CoStar. In addition, TTM market rents grew 9.0%, which is above the 2.5% historical average, but below the 11.4% peak growth in 3Q'01.
Less Established Capital Access, Improving
REXR's inaugural $100 million of senior unsecured notes is an important milestone in the company's transition to a predominantly unsecured borrowing strategy, evidencing broader access to unsecured debt capital. Prior to the company's inaugural private unsecured notes placement, REXR's unsecured borrowings were limited to its bank credit facility, including its $200 million revolver and $100 million term loan. However, Fitch continues to view REXR as a relatively less seasoned unsecured bond issuer pending further private placement issuance.
Heavy Near-Term Lease Maturities
Rexford has a concentrated lease expiration schedule, with approximately 66% of the company's leases by ABRs expiring by the end of 2017 (including month-to-month leases), compared with 40% for the average industrial REIT. Rexford should be able to manage lease rollovers given the depth of small-tenant demand, limited supply in its markets, and the generic nature of its buildings, which should appeal to a wide number of users.
The company's tenant retention has generally ranged from 60% to 80%, which is moderately below its peers. Leasing spreads have been strong during the last five quarters, indicating REXR's rents are below market in aggregate, providing opportunity to capture additional rent on lease expirations.
Refinancings Extend Debt Duration
REXR plans to prepay its secured 2016 and 2017 debt maturities with the proceeds from the private placement issuance. These obligations are floating rate, therefore prepayment penalties are negligible. The company will have no meaningful debt maturities until 2018 when its $200 million revolver matures. The company also has two term loans that mature in 2019 - a $60 million secured term loan and a $100 million unsecured term loan that is part of its credit facility.
Growing Unencumbered Pool
Fitch estimates that the company will unencumber roughly $8.8 million of NOI as a result of its early repayment of its 2016 and 2017 debt maturities, increasing the percentage of unencumbered NOI to 87.1% from 73.9%. The higher amount of unsecured debt in the denominator will reduce unencumbered asset coverage of unsecured debt (UA/UD) to 2.7x from 3.9x at June 30, 2015. This level of coverage is still strong for the 'BBB-' rating.
Fitch views the inherent liquidity elements of REXR's assets as moderately weaker than its peers that focus on bulk distribution warehouses leased to large corporate tenants. Institutional lender and investor appetites are generally greater for the latter. Fitch has considered this risk by using a stressed 9% cap rate to calculate REXR's unencumbered asset value. However, the infill location provides valuation support to REXR's portfolio assets and local investor and lender interest has historically been strong given historically stable market occupancy rates.
Geographic Pure-Play Strategy
The portfolio is composed of industrial assets located in supply-constrained, Southern California markets, of which Los Angeles (50%), San Diego County (17%) and Orange County (14%) were the largest contributors by ABR. This concentration exposes REXR to seismic risks as well as to the economic and political environments in California.
Rexford's nationally oriented peers have materially greater diversification in terms of geography, number of assets and leases. However, Southern California markets have consistently out-performed other national markets on the basis of occupancy, net absorption and asking rents.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--2.5% to 3.0% same store NOI growth, mild incremental cash flow from developments/re-developments and $250 million in annual acquisitions at a 7% cap rate;
--External growth is funded with $100 million in unsecured borrowings and $180 million in equity issuance during 2015;
--Modest development pipeline through 2016;
--Dividend payments in line with its historical payout policy of 70% of AFFO.
RATING SENSITIVITIES
Although unlikely in the near term, the following factors could lead to positive rating momentum:
--Fitch's expectation of leverage sustaining below 6x for several quarters (TTM leverage was 5.2x at March 31, 2015);
--Fitch's expectation of fixed-charge coverage sustaining above 4.5x for several quarters (coverage was 5.3x for the TTM ended March 31, 2015).
The following factors may have a negative impact on REXR's Ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 7x for several quarters;
--Fitch's expectation of fixed-charge coverage sustaining below 3.5x for several quarters.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Rexford Industrial Realty, Inc.
--Issuer Default Rating (IDR) at 'BBB-'.
Rexford Industrial Realty, L.P.
--IDR at 'BBB-';
--$200 million unsecured revolving credit facility at 'BBB-';
--$100 million unsecured term loan at 'BBB-'.
In addition, Fitch has assigned an expected rating of 'BBB-' to Rexford Industrial Realty, L.P.'s $100 million senior guaranteed private placement notes that the company expects to issue on Aug. 6, 2015 under a Note Purchase Agreement announced on July 16, 2015.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988659
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988659
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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