NEW YORK--()--Fitch Ratings has downgraded the Issuer Default Rating (IDR) and revised the issue 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.
--IDR to 'B+' from 'BB-';
--$275 million preferred stock to 'CCC/RR6' from 'B'.
First Industrial, L.P.
--IDR to 'B+' from 'BB-';
--$500 million unsecured revolving credit facility to 'BB/RR1' from 'BB-';
--$775.4 million senior unsecured notes to 'BB-/RR3' from 'BB-';
--$145.2 million senior unsecured exchangeable notes to 'BB-/RR3' from 'BB-'.
In addition, the ratings remain on Rating Watch Negative.
The IDR downgrades center on Fitch's view that First Industrial's fixed charge coverage ratio, which is expected to experience continued pressure over the next 12-24 months, coupled with its limited financial flexibility and liquidity, are more consistent with a 'B+' IDR. The company's financial condition continues to weaken, and the ability to meet certain unsecured debt covenants is limited. In addition, the risk that the company could defer its preferred stock dividends indicates that financial flexibility is constrained; material default risk of the company's corporate obligations is present, but a limited margin of safety remains. The 'B+' IDR takes into account certain credit strengths, including First Industrial's geographically diversified industrial property portfolio, granular tenant roster, reasonable leverage for the 'B+' IDR, and unencumbered asset coverage that provides value to unsecured lenders.
The Rating Watch Negative status reflects the company's proximity to certain of its covenant compliance levels as well as uncertainty as to whether it would suspend a preferred stock dividend. The company has stated that if it is not required to pay preferred stock dividends to maintain REIT status, it may elect to suspend some or all preferred stock dividends for one or more fiscal quarters, which would aid compliance with the fixed charge coverage covenant under its existing line of credit.
The Negative Rating Watch may be resolved in the event that the company definitively addresses its covenant compliance.
First Industrial's industrial real estate operating portfolio remains under pressure, with tenant retention declining to 67.4% on average for the trailing 12 months ended March 31, 2010 from 78.4% for the 12 months ended March 31, 2009. In addition, in-service occupancy decreased to 81.4% as of March 31, 2010 from 86% as of March 31, 2009. Total occupancy declined to 81.1% as of March 31, 2010 from 82.4% as of March 31, 2009. Cash same-store net operating income declined by 3.5% in 2009 and accelerated in the first quarter of 2010, declining by 7.2%, and Fitch anticipates further same-store industrial NOI declines in 2010 and into 2011.
First Industrial's fixed charge coverage ratio (defined as recurring operating EBITDA less recurring capital expenditures and straight-line rental income divided by interest incurred and preferred stock dividends) was 1.1 times (x) for the 12 months ended March 31, 2010, down from 1.2x in 2009. When adjusted for non-cash restricted stock amortization in general and administrative expenses, fixed charge coverage declined to 1.2x for the 12 months ended March 31, 2010, from 1.3x in 2009. In addition, overall transaction volumes have contracted, impacting First Industrial's earnings power and ability to sell weaker-performing assets. Absent significant deleveraging transactions, Fitch anticipates that fixed charge coverage will remain relatively unchanged over the next 12-24 months, as the company will likely experience rental rate roll downs, offset by modest cash retention.
The 'B+' IDR also reflects First Industrial's limited financial flexibility. As of March 31, 2010, $497.2 million was drawn from the company's $500 million revolving credit facility. In addition, the company is in compliance relative to the fixed charge coverage and unsecured leverage covenants in its line of credit agreement by thin margins. Even if the company's level of compliance were to improve, Fitch believes that the company's overall liquidity could remain under stress.
Fitch calculates that the company's sources of liquidity (unrestricted cash, availability under the company's revolving credit facility, and projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (debt maturities pro forma for the redemption of 2011 notes during April 2010 and projected recurring capital expenditures) result in a liquidity coverage ratio of 0.7x from April 1, 2010 to Dec. 31, 2011. In the event that the company extinguished its pro rata share of joint venture debt and the company continues to refinance mortgage debt through new financings, liquidity coverage would be 1.1x.
The 'B+' IDR takes into account First Industrial's geographically diversified industrial property portfolio, which includes 781 properties located in 28 states in the United States and one province in Canada. The company's largest markets are Detroit and Chicago, comprising 7.5% and 7.1% of rental income respectively, and no other market comprised more than 7% of rental income as of March 31, 2010. While this diversification insulates First Industrial from regional trends, several of the company's other large markets, including Dallas/Ft. Worth (6.3%), Minneapolis/St. Paul (6.3%), Central Pennsylvania (5.4%), and Atlanta (4.7%) have occupancy rates of below 80%. The company has a granular tenant roster across industries, and its largest tenant comprises only 2.3% of total rent.
The company's net debt-to-recurring operating EBITDA was 9.0x as of March 31, 2010, down from 12.4x as of Dec. 31, 2008. When adjusted for non-cash restricted stock amortization charges, net debt-to-recurring operating EBITDA was 8.7x as of March 31, 2010, down from 10.7x as of Dec. 31, 2008
The company's portfolio was 77% unencumbered as of March 31, 2010, and unencumbered asset coverage ratio (defined as 77% of real estate assets divided by unsecured debt) was 1.7x. Unencumbered asset coverage of unsecured debt is lower when utilizing a range of capitalization rates against unencumbered NOI.
In accordance with Fitch's Recovery Rating (RR) methodology, Fitch has assigned RRs because of the IDR downgrade to 'B+'. While aspects of Fitch's RR methodology are considered for all companies, explicit Recovery Ratings are assigned only to those companies with an IDR of 'B+' or below. At the lower IDR levels, Fitch believes there is greater probability of default, so the impact of potential recovery prospects on issue specific ratings becomes more meaningful and is more explicitly reflected in the ratings dispersion relative to the IDR.
The 'BB/RR1' ratings on First Industrial's senior unsecured revolving credit facility reflect the view that recoveries would be superior for the lenders under the line of credit in the event of a default. The 'BB-/RR3' ratings on the senior unsecured notes and senior unsecured exchangeable notes reflect that due to the presence of an unencumbered pool, recoveries would be above-average for bondholders but would be weaker than bank recoveries given adverse selection risk. The 'CCC/RR6' ratings on First Industrial's preferred stock reflect Fitch's view that recovery prospects for preferred stock would be minimal given default.
The following factors may result in positive momentum on the ratings:
--If the Fitch fixed-charge coverage ratio sustains above 1.2x (for the 12 months ended March 31, 2010, fixed-charge coverage was 1.1x);
--If the company's unencumbered asset coverage of unsecured debt and preferred stock sustains above 1.8x (as of March 31, 2010, the company's unencumbered asset coverage ratio was 1.7x but weaker when utilizing a range of capitalization rates on unencumbered NOI);
--A liquidity surplus.
The following factors may result in negative momentum on the ratings:
--If the Fitch fixed-charge coverage ratio sustains at 1.0x or lower;
--If the company's unencumbered asset coverage of unsecured debt and preferred stock sustains below 1.6x;
--A covenant violation;
--A suspension of the company's preferred stock dividend.
Relevant Fitch criteria available on the Fitch web site at www.fitchratings.com include:
--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;
--Corporate Rating Methodology, Nov. 24, 2009;
--Evaluating Corporate Governance, Dec. 12, 2007;
--Parent and Subsidiary Rating Linkage, June 19, 2007.
Organized on Aug. 10, 1993, First Industrial is a REIT that owns, manages, acquires, sells, develops, and redevelops industrial real estate. As of March 31, 2010, First Industrial had $3.7 billion in undepreciated book assets, a total market capitalization of $2.7 billion, and an equity market capitalization of $807.8 million. As of March 31, 2010, First Industrial owned 781 industrial properties located in 28 states in the U.S. and one province in Canada, containing approximately 69 million square feet of gross leasable area.
Additional information is available at www.fitchratings.com.