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Fitch Affirms Rexford Industrial Realty at 'BBB-'; Outlook Stable
September 22, 2017 / 3:10 PM / 3 months ago

Fitch Affirms Rexford Industrial Realty at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, September 22 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of Rexford Industrial Realty, Inc. (NYSE: REXR) and its operating subsidiary, Rexford Industrial, LP, at 'BBB-'. The Rating Outlooks are Stable. The affirmation takes into account REXR's regionally focused, infill Southern California (SoCal) industrial market concentration, transparent business model, with limited ground-up development or off-balance sheet joint ventures (JV), and credit metrics that are appropriate for its rating. In addition, the company has adequate financial flexibility in the intermediate term, with only 11% of debt maturing by end-2020 that is supplemented by solid contingent liquidity from REXR's large unencumbered property portfolio. The company's small size and scale and less established unsecured debt capital access balance these credit strengths. The Stable Outlook reflects Fitch's expectation that REXR will maintain credit metrics that are consistent with its rating over the next year or two as well as our view on near- to medium-term industrial property fundamentals. KEY RATING DRIVERS Portfolio Concentration Risk: Fitch sees REXR's exposure to the vibrant, supply-constrained SoCal industrial markets as a net credit positive that offsets undiversifiable geographic concentration risk. Moreover, the SoCal industrial market is the largest in the U.S., at around 1.8 billion square feet, and has consistently outperformed most of the country's other logistic hubs with respect to occupancy, net absorption and rent growth. Transparent Operating Strategy: REXR's transparent, well-defined operating strategy is a credit positive. The company targets 100% fee simple ownership of industrial assets in supply-constrained, logistics markets in the SoCal region. Los Angeles County was its largest market, at 46% of annual base rent as of June 30, 2017, followed by San Bernardino County (15%) and San Diego County (15%). REXR does not pursue ground-up, greenfield development, but does periodically redevelop properties on a moderate scope. This comprises less than 3% of gross assets. The strategy does not contemplate fund management or investments in unconsolidated JVs, helping simplify its business model, improve financial-reporting transparency and reduce contingent liquidity claims. Fitch's rating for REXR includes some flexibility for selective ground-up development at existing owned infill properties and a limited amount of JVs if, for example, only a partial interest in an attractive industrial portfolio in its markets was available for purchase. Appropriate Credit Metrics: Fitch expects REXR to sustain its leverage at around 6.0x through 2019, as the company balances acquisition-related borrowings against solid mid-single digit same store net operating income growth; approximately $10 million of its incremental net operating income (NOI) comes from its non-stabilized portfolio. REXR's leverage of 6.2x for the trailing 12 months (TTM) ending June 30, 2017, is appropriate for its rating. Fitch expects the company to sustain its fixed-charge coverage (FCC) in the mid 3.0x range through 2019 (3.4x for the TTM ending June 30, 2017), with property NOI growth offset by higher interest costs due to less floating-rate debt and preferred stock dividends. Fitch calculates its 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. Portfolio and Asset Concentration: Fitch expects REXR's portfolio asset and market granularity to improve as it executes on its value-add acquisition-led growth strategy. However, we do not expect the company to expand beyond the SoCal market. REXR's concentrated portfolio exposes it to idiosyncratic market and asset risks, which could result in above-average property-income volatility; for example, a regional economic downturn or loss of a significant tenant. The company's small size and concentration in markets with higher per square foot industrial values relative to its peers has contributed to its less-diversified portfolio. However, the multiple-building aspect of its portfolio, where many of its larger assets are leased to different tenants, as well as infill locations help offset the asset concentration risk. REXR's top-10 tenants contributed 11.7% of its average base rent at June 30, 2017, which is more diversified than several of its industrial REIT peers. Moreover, its largest tenant - 32 Cold - was only 1.6% of its average base rent versus a comparable-peer median top-tenant exposure of approximately 2.0%. Fitch sees REXR's portfolio tenant diversification as a credit positive that mitigates cash flow volatility risks. Less Established Capital Access: REXR is a new, less-established unsecured borrower. However, it continues to develop its unsecured debt capital access, most recently evidenced by a $125 million unsecured note private placement in July 2017. REXR has raised $225 million in private placement unsecured notes since July 2015. This ongoing access to private placement unsecured notes is an important inflection point in the company's transition to a predominantly unsecured borrowing strategy. Preferred Stock Notching: The two-notch differential between REXR's IDR and its preferred stock rating of 'BB' 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. DERIVATION SUMMARY REXR's rating reflects its solid portfolio of industrial real estate in one of the strongest markets in the U.S., and leverage that is appropriate for its rating category. The company is positioned to grow faster than the peer average in the near- to medium-term and has a transparent business model with minimal exposure to development risk. These strengths are balanced by its smaller, less diversified portfolio relative to higher-rated industrial REIT peers, such as Prologis, Inc. (BBB+/Stable) and Duke Realty Corporation (BBB+/Stable). In addition, REXR has higher leverage and lower coverage than higher-rated industrial peers, such as Liberty Property Trust (BBB/Stable) and First Industrial Realty Trust, Inc. (BBB/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --GAAP same store NOI growth in the mid-single-digit range through to 2019; --Net acquisitions of roughly $350 million per year through 2019 at 5.5% yields; --G&A growth of 2% per annum during the forecast period; and --5% annual dividend growth during the forecast period. RATING SENSITIVITIES Future Developments that May, Individually or Collectively, Lead to Positive Rating Action -- Leverage sustained below 6.0x for several quarters (6.2x for the TTM ended June 30, 2017); and -- FCC sustained above 4.5x for several quarters (coverage was 3.4x for the TTM ended June 30, 2017). Future Developments that May, Individually or Collectively, Lead to Negative Rating Action -- Leverage above 7.0x for several quarters; and -- FCC below 3.5x for several quarters. LIQUIDITY Below Average, but Adequate: REXR's capital sources cover its uses by 1.1x for the July 1, 2017 to Dec. 31, 2018 period under Fitch's base-case liquidity analysis after adjusting for events subsequent to quarter-end, including the $125 million private placement of unsecured notes and $286 million of acquisitions. We expect liquidity to improve in 2H17 after the company executes an incremental $145 million common stock issued on the at-the-market (ATM) program and completes further dispositions. The company also has $278 million available from its $350 million revolver, cash on hand, and a modest amount of retained cash flow after dividends as additional sources of liquidity. Near to intermediate term maturities are modest, although REXR does have elevated debt maturities in the 2020s, consisting of term loans and unsecured borrowings. Fitch expects the company to refinance its 2022 term loan ahead of the stated maturity, most likely with proceeds from new unsecured private placement notes. REXR's longer-dated maturities should decline as a percentage of total debt as the company executes its value-add acquisition growth strategy. REXR's unencumbered assets cover its unsecured debt (UA/UD) by 2.4x using a direct capitalization approach of its annualized 2Q17 unencumbered NOI, which assumes a stressed 9% through-the-cycle cap rate. Fitch sees this as appropriate for REXR's rating. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Rexford Industrial Realty, Inc. --Long-Term IDR at 'BBB-', Stable Outlook; and --Preferred stock rating at 'BB'. Rexford Industrial Realty, LP --Long-Term IDR at 'BBB-', Stable Outlook; --$350 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-'; and --$125 million unsecured notes at 'BBB-'. Contact: Primary Analyst Peter Siciliano Director +1 646 582 4760 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Stephen Boyd, CFA Senior Director +1 212 908 9153 Committee Chairperson Steven Marks Managing Director +1 212 908 9161 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Date of Relevant Committee: Sept. 21, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock based compensation. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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