DBRS Morningstar Confirms Credit Ratings on IRG Industrial, LLC at BBB (low) with Stable Trends

DBRS, Inc. (DBRS Morningstar) confirmed the Issuer Rating of IRG Industrial, LLC (IRG or the Company) and the rating on its Senior Unsecured Notes at BBB (low) with Stable trends. The rating confirmations are supported by IRG’s (1) diversification across tenant base, properties, and geographies across the U.S., (2) lease maturity profile, (3) modernized and upgraded industrial assets, and (4) the Company’s track record of repositioning transitional assets. The ratings are constrained by (1) IRG’s elevated leverage as measured by total debt-to-EBITDA and (2) the execution risk of its transitional asset plans. There is very limited flexibility within the current rating category.

The Stable trends reflect DBRS Morningstar's expectation of meaningful improvement in the Company’s total debt-to-EBITDA ratio from the current level and the debt-to-EBITDA ratio to improve to the mid-9.0 times (x) by YE2023 and 9.1x by YE2024, with the EBITDA-to-interest coverage ratio sustainably remaining above 2.00x, all else equal.

IRG’s Financial Risk Assessment factors deteriorated relative to DBRS Morningstar's expectations from its prior review of December 12, 2022, which projected the total debt-to-EBITDA ratio and EBITDA-to-interest coverage ratio for YE2023 to be at 8.7x and in the mid-2.00x range, respectively. As of the last 12 months (LTM) ended June 30, 2023, the debt-to-EBITDA and EBITDA-to-interest coverage ratios were 10.0x and 2.14x, respectively, primarily driven by a greater amount of variable interest rate debt than DBRS Morningstar expected. In H1 2023, the Company started lending funds to affiliate entities to finance off-balance sheet development projects by drawing on its credit facility, which has a variable interest rate. A total of $93.5 million was advanced as of June 30, 2023, with repayment expected over the next three years. These transactions have resulted in materially more variable interest rate debt and a weakened liquidity risk profile.

EBITDA improved 17.5% to $130.6 million for the LTM ended June 30, 2023, relative to YE2022, largely driven by strong same-store net operating income (NOI) growth, rental rate increases on renewing leases, and stabilization of transitional assets. DBRS Morningstar expects EBITDA to surpass $140 million for YE2023 and further improve in 2024 to the $150 million range because of continued improving strong same-store NOI growth, significant upside in rental rates for lease maturities, and net leasing absorption.

All else equal, DBRS Morningstar would consider negative rating actions should the Issuer not achieve (or surpass) DBRS Morningstar’s debt-to-EBITDA projections of 9.4x in YE2023 and 9.1x in YE2024, all while sustaining an EBITDA-to-interest coverage ratio above 2.00x. Conversely, all else equal, DBRS Morningstar may consider positive rating actions should IRG maintain its debt-to-EBITDA below 8.7x and improve its EBITDA-to-interest coverage ratio above 2.33x on a sustained basis while maintaining adequate coverage of its unsecured debt (assuming a fully drawn revolving credit facility) relative to its unencumbered asset pool from its Core portfolio on a sustained basis.

There were no Environmental/Social/Governance factors 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

Notes:
All figures are in U.S. dollars unless otherwise noted.

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (dated April 11, 2023) https://www.dbrsmorningstar.com/research/412477

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
-- DBRS Morningstar Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022) https://www.dbrsmorningstar.com/research/407058
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (September 27, 2023) https://www.dbrsmorningstar.com/research/421119

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 696-6293