Fitch Affirms Rexford Industrial's IDR at 'BBB-'; Assigns 'BB' to Preferred Stock
The Rating Outlook is Stable.
KEY RATING DRIVERS
REXR's credit strengths include its focused, in-fill Southern California (SoCal) industrial portfolio strategy, transparent business model with limited ground-up development and off balance sheet joint ventures and credit protection metrics that are appropriate for the rating and are supported by portfolio rents that Fitch believes are 10% to 15% below market, on average. REXR also has a strong near-to-medium term liquidity profile that is supplemented by good contingent liquidity available from its sizeable unencumbered property portfolio.
REXR's less established, but improving access to unsecured debt capital is a credit concern. The company's liquidity management policies are also weaker in key areas than its 'BBB' category rated REIT peers in the aggregate. Examples include its line of credit utilization rate, some longer-dated debt maturity concentration risk, and above average floating rate debt exposure.
MARKET EXPOSURE BALANCES CONCENTRATION RISK
Fitch views REXR's exposure to vibrant, supply constrained SoCal industrial markets as a net credit positive that offsets undiversifiable geographic concentration risk. Although REXR's nationally oriented peers have greater market diversification, SoCal industrial markets have consistently out-performed most key U. S. logistics hubs on the basis of occupancy, net absorption and asking rents. However, the concentration exposes REXR to seismic risks as well as to the economic and political environments in California.
REXR owns and controls a portfolio of 131 principally multi-tenant industrial assets located in supply-constrained, SoCal markets. Los Angeles County was the company's largest market at 48% of annual base rent, followed by Orange County (17%) and San Diego County (16%) as of June 30, 2016.
APPROPRIATE CREDIT PROTECTION METRICS
Fitch expects REXR's credit protection metrics - leverage and fixed-charge (FCC) and unencumbered assets to unsecured debt (UA/UD) coverages - to sustain at levels appropriate for a 'BBB-' rated REIT with the company's asset profile through Fitch's 2018 projection period.
REXR's leverage should sustain in the 6x to 7x range during the next 12 to 24 months as the company balances acquisition related borrowings against solid mid-single digit rental-rate led internal growth and approximately $10 million of incremental net operating income (NOI) from its non-stabilized portfolio.
Low cap rates (5% range or less) for SoCal industrial properties argue for REXR's ability to support a higher level of leverage for a given rating level on a debt to EBITDA basis, while maintaining a consistent loan-to-value (LTV) ratio with some of its more diversified REIT peers. However, Fitch believes market concentration risk and less institutional investor and lender demand for the company's core, small dollar value multi-tenant industrial assets offset leverage/LTV discrepancy.
REXR's leverage was 6.0x for the annualized quarter ended June 30, 2016, after adjusting for a full period impact of in-place rental income from partial period property acquisitions and sales. Fitch calculates REIT leverage as consolidated debt net of readily available cash over operating EBITDA, including recurring cash distributions from unconsolidated joint ventures (JVs) and excluding non-cash above and below market lease income and stock-compensation expense.
Fitch expects REXR's FCC to sustain in the mid-3.0x range through 2018 as property net operating income growth is offset by higher interest costs due to less floating rate debt and preferred stock dividends. Fitch calculates REXR's FCC as operating EBITDA, including recurring cash distributions from unconsolidated JVs, less recurring maintenance capex and non-cash rental income over cash interest expense and preferred dividends.
TRANSPARENT BUSINESS STRATEGY
REXR operates with a transparent business model, which Fitch views as a credit positive. Unlike many of its peers, the company does not pursue ground-up, greenfield development. REXR does have an active value-add redevelopment strategy; however, the scope of its activities is generally small, comprising less than 2% of gross assets.
Fund management and JVs are not a meaningful part of the company's strategy; however, REXR has received interest institutional investors and Fitch believes would consider a JV to fund external growth within its financial policy targets if other attractively priced equity avenues are unavailable.
LESS ESTABLISHED CAPITAL ACCESS
REXR's inaugural $100 million private placement of senior unsecured notes that closed during July 2015 was a positive milestone in the company's transition to a predominantly unsecured borrowing strategy, evidencing broader access to unsecured debt capital.
During January 2016, the company secured a $125 million, seven-year, bank-syndicated unsecured term loan that REXR expanded to $225 million earlier this month by exercising its $100 million accordion option to help fund its $191 million Orange County, CA portfolio acquisition.
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 less seasoned unsecured bond issuer pending further private placement issuance.
LESS CONSERVATIVE LIQUIDITY MANAGEMENT
REXR's liquidity management is less conservative than its peers in some key aspects. For example, the company's average revolver utilization during since its IPO in the second quarter of 2013 (2Q13) was 36% vs. 25% for selected industrial REIT peers. Also, the company's variable rate debt percentage was 45% vs. 13% for its peers at Dec. 31, 2015. REXR's variable rate exposure would have been 34% at the end of last year, assuming all of its interest rate swaps were effective. Lastly, the company's debt maturity schedule is imbalanced, with 35% of its debt maturing during 2018, 41% during 2019 and 24% during 2025 at Dec. 31, 2015. The company's 2016 financing activity has added some balance to its maturity schedule.
Fitch's key assumptions within the agency's rating case for the issuer include:
--SSNOI growth in the mid-single digit range through 2018;
--Net acquisitions of $150 million during 2016 through 2018 at 5% going in yields (6.5% stabilized yield within 18 - 24 months);
--G&A growth of 2% per annum during the forecast period; and
--5% annual dividend growth during the forecast period.
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 (leverage was 6.0x at June 30, 2016);
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x for several quarters (coverage was 3.7x for the quarter ended June 30, 2016).
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.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following:
Rexford Industrial Realty, Inc.
--Long-Term IDR at 'BBB-'.
Rexford Industrial Realty, L. P.
--Long-Term IDR at 'BBB-';
--$200 million unsecured revolving credit facility at 'BBB-';
--$100 million unsecured term loan at 'BBB-';
--$225 million unsecured term loan at 'BBB-';
--$100 million unsecured notes at 'BBB-'.
Fitch has assigned the following:
Rexford Industrial Realty, Inc.
--Preferred stock at 'BB'.