Fitch Rates Terreno's $50MM Senior Unsecured Notes 'BBB-'; Outlook Stable
These notes are the first closing in a \\$100 million private placement of senior unsecured notes consisting of \\$50 million with a seven-year term and \\$50 million with a 12-year term that the company announced on Sept. 2, 2015. The company expects the 12-year notes to close on or around Oct. 13, 2015 and bear interest at a fixed annual rate of 4.65%.
A full list of Fitch's ratings for Terreno Realty Corporation and its operating partnership Terreno Realty LLC. (Terreno; TRNO or the company) follows at the end of this release.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's ratings take into account TRNO's strong portfolio market concentrations, transparent industrial property-focused business model, experienced management, and credit metrics that are moderately strong for the rating. The potential for greater cash flow volatility stemming from market, asset and tenant concentration risk and possible missteps surrounding the company's value added acquisition-led growth strategy balance these credit positives. Also, the company has a less developed and shorter track record as an unsecured borrower.
Fitch's Stable Outlook reflects our expectation that TRNO will maintain credit metrics over the rating horizon (typically one to two years) that are consistent with the 'BBB-' rating, in the context of positive near- to medium-term industrial property fundamentals.
Portfolio Concentrated in Strong Markets
Fitch expects TRNO's portfolio market fundamentals to outperform the U.S. average over the rating horizon, based on the superior demographics and barriers to new supply. The company's portfolio is located in six of the strongest U.S. industrial markets, characterized by vibrant and growing local and regional economies with favorable population demographics and meaningful barriers to new supply.
The above-average occupancies and rents within Terreno's markets relative to the broader U.S. industrial property base evidences the strong fundamentals. The institutional investor and lender interest in TRNO's assets is likely above its peer average given the desirable market locations supporting the company's contingent liquidity position.
Terreno owned 137 buildings aggregating approximately 10.5 million square feet that were approximately 94.4% leased to 317 customers as of June 30, 2015, as well as two improved land parcels consisting of 3.5 acres.
Transparent Operating Strategy
Fitch views Terreno's transparent and well-defined operating strategy as a credit positive. The company targets 100% fee simple ownership of industrial assets in six key logistics markets that include Northern NJ/NY (25% of annualized base rent [ABR]), D.C./Baltimore (24%), Miami (15%), Los Angeles (15%), San Francisco (13%) and Seattle (8%).
TRNO has not made, nor does its business model contemplate, investments in ground-up development or unconsolidated joint venture partnerships (JVs). The absence of these items helps simplify the company's business model, improve financial reporting transparency and reduce potential contingent liquidity claims, which Fitch views positively.
Fitch's rating for TRNO includes some flexibility for selective ground-up development at existing owned in-fill properties, as well as a limited amount of JVs if, for example only a partial interest in an attractive industrial portfolio in its markets was available for purchase.
Strong Credit Metrics
Fitch expects TRNO's leverage to sustain within a range of 6.0x - 6.5x through 2017, on an adjusted basis that includes a full-year's contribution from external investment activity. Fitch expects the company's fixed-charge coverage (FCC) to moderate, but remain strong over the rating horizon as the company transitions toward more fixed-rate debt. Our projections show the company's FCC improving to the mid-3.0x range through 2017.
The company has publicly committed to financial policies through the cycle that are consistent to moderately strong for a 'BBB-' rated REIT with TRNO's asset profile. These include maintaining net debt-to-recurring operating EBITDA below 6.5x and FCC above 2.0x. The company's stated policy is to target a dividend payout of 100% of its taxable net income.
Solid Liquidity Position
Fitch estimates TRNO's sources of capital cover its uses by 2.5x for the period July 1, 2015 to Dec. 31, 2016. Limited near-term debt maturities, full availability under the company's \\$100 million revolver and the absence of unfunded development commitments are key factors that support its liquidity position.
TRNO's unencumbered assets cover its unsecured debt (UA/UD) by 2.5x, pro forma for its \\$50 million unsecured notes offering. Fitch calculates unencumbered asset value using a direct capitalization approach of TRNO's annualized 2Q'15 unencumbered net operating income (NOI) that assumes a stressed 8.75% through the cycle cap rate. Fitch expects the company's UA/UD to moderate to the low-to-mid 2x range as it progresses in its unsecured borrowing strategy, which would remain appropriate for the.
The company has few near-term maturities; however, it does face a meaningful amount of debt coming due during 2019 to 2021 when its three unsecured term loans mature. Fitch expects the company to refinance these obligations well ahead of their stated maturities, most likely with proceeds from new unsecured borrowings.
Experienced Management
TRNO has a strong management team with extensive industrial real estate and capital markets experience. Many of the company's key executives previously held high level executive positions at AMB Property prior to its merger with ProLogis.
Portfolio Market and Tenant Concentration
TRNO's concentrated portfolio strategy exposes it to idiosyncratic market and asset risks and could result in above-average property income volatility. Examples could include a regional economic downturn or loss of a significant tenant. Fitch expects the portfolio's asset and tenant granularity to improve as TRNO executes on its value-add acquisition-led growth strategy. However, we do not expect the company to expand beyond its six major markets.
The company's small size and concentration in markets with higher per square foot industrial values relative to its peers has contributed to its below-average asset granularity. Two markets - Northern NJ/NY and D.C./Baltimore - comprised of 49.2% of the company's ABR as of June 30, 2015. Moreover, its 10 largest properties (at cost) accounted for roughly 40% of its total investment in real estate. The multiple-building nature of many of its larger assets, as well as their infill locations help to offset the asset concentration risk.
TRNO's top-20 tenants comprised 42% of ABR at June 30, 2015, which is meaningfully more concentrated than the comparable 21% median for its peers. Moreover, the company's largest tenant (FedEx Corp.) comprised 4.5% of its ABR versus a comparable median of 2.2% for its peers. Fitch views the company's portfolio tenant concentration as a credit risk that could lead to greater cash flow volatility, all else equal. However, the strong tenant credit quality of many of its largest tenants and multiple leases with many of these tenants help balance the tenant concentration risk.
Execution Risk in Value-Add Acquisitions
TRNO's external growth strategy centers principally on the acquisition and stabilization of industrial assets, primarily through some combination of lease-up and property redevelopment. Fitch generally views the value-add strategy as being in between 'core' investments and ground-up development in risk/return space. Value-add acquisitions can entail additional risk given less familiarity with an asset relative to the repositioning of existing owned assets. However, Fitch views TRNO management's extensive industrial property experience and the small dollar value and homogeneity of industrial assets as risk mitigants.
Improving Unsecured Capital Access
TRNO's sale of \\$100 million of private placement unsecured notes (including \\$50 million under a delayed draw set for Oct. 2015) is an important milestone in the company's transition to a predominantly unsecured borrowing strategy that evidences broader access to unsecured debt capital. Prior to the company's inaugural private unsecured notes placement, TRNO's unsecured borrowings were limited to its three term loans, as well as drawdowns under the company's unsecured revolver. However, Fitch continues to view TRNO as a relatively unseasoned unsecured bond issuer pending further private placement issuance.
Preferred Stock Notching
The two-notch differential between TRNO's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB-' IDR. These preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
KEY ASSUMPTIONS
--GAAP SSNOI growth (excluding redevelopment properties) of roughly 4% in 2015 and 3% in 2016 and 2017;
--Acquisitions of \\$350 million in 2015, 2016 and 2017 at an approximate 6% stabilized average cap rate;
--Dispositions of \\$25 million per annum at cap rates of 5.5%;
--Unsecured borrowings of \\$150 million during 2015, \\$120 million during 2016 and \\$115 million during 2017 at rates of 4.25%, 4.5% and 4.75%, respectively;
--Equity issuance of roughly \\$40 million during 2015, \\$200 million during 2016 and \\$150 million during 2017;
--TRNO refinances its preferred equity when it becomes callable in 2017 with new common equity;
--The company unencumbers assets as mortgages mature with the proceeds from new unsecured debt and equity raises.
RATING SENSITIVITIES
The following factors may have a positive impact on the ratings and/or Rating Outlook:
--Further asset and tenant level diversification within the company's concentrated, six-market portfolio;
--Demonstrated access to the unsecured bond market;
--Fitch's expectation of leverage sustaining in the low 6.0x range (leverage was 4.6x for the annualized quarter ended June 30, 2015);
--Fitch's expectation of FCC sustaining above 3.0x (coverage was 4.1x for the quarter ended June 30, 2015).
The following factors may have a negative impact on the ratings and/or Rating Outlook:
--Fitch's expectation of leverage sustaining above 7.0x;
--Fitch's expectation of FCC sustaining below 2.0x.
FULL LIST OF RATING ACTIONS
Fitch currently rates Terreno as follows:
Terreno Realty Corporation
--Issuer Default Rating (IDR) 'BBB-';
--Preferred stock 'BB'.
Terreno Realty LLC
--IDR 'BBB-';
--Senior unsecured revolving line of credit 'BBB-';
--Senior unsecured term loans 'BBB-'.
Комментарии