DBRS Limited (DBRS Morningstar) confirmed IRG Industrial, LLC's (IRG or the Company) Issuer Rating and the rating of its Senior Unsecured Notes at BBB (low) with Stable trends. The Stable trends reflect IRG's improvement of business risk assessment factors, most notably market position and portfolio size, since the last full review in November 2021. IRG has increased its franchise across the U.S. through recent acquisitions and continues to demonstrate its track record of successful real estate transactions. IRG's growth and scale can enhance its operations through economies of scale, increased visibility and brand strength, and by improving various forms of diversification. Additionally, IRG displayed its niche positioning and local expertise within certain markets, specifically in the Midwest.
The rating confirmation is supported by its (1) adequate diversification across tenant base, properties, and geographies across the U.S.; (2) sufficient lease maturity profile that is typical for industrial asset types; (3) IRG's net operating income (NOI) stability from its modernized and upgraded industrial assets; (4) IRG's track record of repositioning transitional assets to generate high returns on investments; and (5) DBRS Morningstar's continued expectation of meaningful improvement in its total debt-to-EBITDA ratio. The rating continues to be constrained by its (1) current elevated leverage as measured by total debt-to-EBITDA (11.8 times (x) for the last 12 months (LTM) ended September 30, 2022); (2) IRG's lack of scale with EBITDA, well below the EBITDA of typical real-estate entities in the BBB-rating category; (3) execution risk of its transitional asset plans; and (4) limited asset-type diversity with a concentration of industrial and flex-type properties.
EBITDA considerably improved as expected thus far in 2022, totaling $96.2 million as of the LTM ending September 30, 2022, largely driven by strong same-store NOI growth, recent leasing activity, and acquisitions made in 2021. DBRS Morningstar expects the Company's earnings profile will continue improving in the near term, primarily as a result of continued strong same-store NOI growth and robust net leasing absorption. EBITDA is projected to surpass $100 million by year-end (YE) 2022 and further improve in 2023. The debt-to-EBITDA ratio is anticipated to near 9.8x in YE2022 and the high-8.0x range in YE2023. DBRS Morningstar expects the Company’s debt profile to be relatively stable for the foreseeable future while EBITDA trends upward. Meanwhile, the EBITDA interest coverage ratio is projected to deteriorate to the mid-2.00x range (3.09x as of the LTM ended September 30, 2022) as a result of the variable-rate debt exposure and the run rate of the Senior Unsecured Notes’ interest expense.
All else equal, if the total debt-to-EBITDA ratio remains greater than 9.8x on a sustained basis, DBRS Morningstar would likely consider a negative rating action. Conversely, DBRS Morningstar may consider a positive rating action should IRG sustainably maintain its debt-to-EBITDA ratio below 9.3x and maintain adequate coverage of its unsecured debt, assuming a fully drawn revolving credit facility, relative to its Core portfolio on a sustained basis.
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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